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SPIRIT Blockchain – Bitcoin Is Finding a Silver Lining

Things are looking up again for Bitcoin. The network’s mining difficulty has increased by 9.26% yesterday –  its biggest adjustment since January amid a rapid increase in the hashrate over the past two weeks. Elsewhere, some Bitcoin mining and on-chain metrics suggest the worst is behind for the mining industry. This is not to say that we’re in for a quick rebound in price yet. The current macroeconomic backdrop inevitably poses some challenges for Bitcoin since it hasn’t been immune to the weakness in risk assets and the global economic uncertainty. So we’re probably not out of the woods yet.

Looking back, the bear market has been very challenging for publicly listed mining companies. The combination of lower BTC prices, rising network difficulty, higher energy prices and a more difficult financing environment, among other things, clearly impacted 2Q financial results and dampened their outlook. Many of these negative factors persist, resulting in compressed margins and delays in the deployment of mining rigs. Admittedly, the fallout from the crypto lender crisis also weighed on prices of mining rigs, partly resulting in a fire sale after lenders took possession of the machines that collateralized their loans to weaker miners.

However, there is a silver lining. The recent surge in the Bitcoin hashrate shows that miners continue to deploy next generation miners while some miners are coming back online given lower energy prices. On-chain metrics are also painting a more bullish picture for the mining industry. On Friday, the time-tested “hash ribbons” indicator flagged a strong signal, suggesting the end of the miner capitulation period. Bitcoin miner capitulations occur when a significant portion of miners turn off their machines over an extended period of time or divest of their bitcoin treasuries. The relationship between the price of Bitcoin and its average operating cost of production for mining rigs plays an important role in Bitcoin price cycles. Historically, miner capitulations mark bitcoin price bottoms in that they are characterized by significant selling pressure from weaker miners forced to tap into their treasuries to maintain their operations or debt servicing. Once the forced selling ends and miners stop unloading their bitcoin balance sheet holdings to the market, things start to normalize. Importantly, the end of a miner capitulation phase doesn’t entail an instant price rebound. While there is no guarantee that the capitulation is over – neither from a mining nor an on-chain metrics perspective – Bitcoin could soon be in heavy accumulation again.


Manuel Trojovsky, Head of Crypto Investments & Research


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