TLDR
Every bitcoin bear market ends in capitulation and the mining sector is getting close to reaching it.
The Bitcoin mining sector has been hit hard by the recent bear market, with layoffs, bankruptcies, and negative press taking their toll. However, as with all bear markets, there comes a point where the pain reaches its climax and things start to recover. And according to a variety of data, it appears that the mining sector has reached this point, which is good news for those looking towards the new year.
Before diving into the data, it’s worth understanding what “capitulation” means. In financial markets, it refers to an acute and often dramatic crescendo of fear or widespread surrender by investors or businesses during the throes of depressed market conditions. For mining, it means that the economics have become so bad and operating margins are so thin that miners are quitting or being squeezed out of the market.
One sign of miner capitulation is when financial analysts who report on publicly-traded mining companies begin to turn bearish. Over the past 12 months, these analysts have preached about the upside potential of Bitcoin mining stocks. But now they are “pulling the plug.” This language was used by Chris Brendler of DA Davidson to describe his outlook on the mining sector. Since July, Brendler has said that the current market conditions were a good time to buy mining stocks, as reported by CoinDesk.
In December 2021, JPMorgan’s analyst Reginald Smith also wrote a memo that said one particular mining company — Iris Energy — has “more than 100% upside.” He also suggested the current stock price was at a “deep discount.” Shares of the company were trading around $14 at the time of the memo. Now they’re trading below $2… an even deeper discount!
The Bitcoin hash rate has steadily grown larger for the entirety of the bear market to date, forcing difficulty increase after increase on struggling miners. But that trend might be changing. In early December, the next adjustment is set to drop by almost 11% at the time of writing. This drop will be caused by hash rate falling, which is notably off its recent all-time highs and currently sitting near 240 exahashes per second (EH/s).
Normally, a dip in hash rate and difficulty would not be too significant. But seven of the past nine difficulty adjustments have been positive. And in context of the incessant hash rate growth and subsequent hash price collapse, the apparent trend reversal for hash rate is notable. Some miners appear to be throwing in the metaphorical towel and taking their machines offline.
Despite the hardships, Bitcoin miners are re-accumulating. Current data shows notably larger balances compared to just a month ago. In short, net selling activity by miners appears to have subsided and their stockpiles of Bitcoin are on the rise again. One-hop miner balances have increased by over 3%, or roughly 85,000 BTC since early October. Perhaps miners decided it’s time to HODL again.
Assuming the above analysis is correct and capitulation has occurred, the market will not immediately recover. As the dust settles and survivors emerge, the process of building and scaling more mining infrastructure will continue. But the fact that the mining sector has reached its trough of bearishness is a positive sign for those looking towards the future of Bitcoin.