Mimesis Capital: Inside The Event Horizon, Report No. 17
Why Hash Ribbons Predict Local Bitcoin Funds So Accurately
Theory: When the price of bitcoin reaches a certain level, the selling pressure begins to disappear exponentially.
Bitcoin mining is a ruthless industry. In the long run, only the most efficient mining companies will survive.
The mining industry’s tendency to attract a great deal of competition combined with the simplicity and beauty of the Bitcoin protocol could give us a method of predicting local “floor prices” for bitcoin.
Blockware Solutions, a bitcoin mining company, released a detailed report last year on how halves directly affect miners and how much selling pressure is removed from the market after the halving.
Take a look at the full report to get a good idea of how they reached their specific conclusions, but they estimated that USD-denominated forced mining sales would drop 70% after halving with no price change.
This was probably a major catalyst for the current bull run.
How does this work?
Sell pressure drops due to the capitulation of the miners.
Immediately after a reduction by half, the capitulation of the miners occurs because the block subsidy is cut in half, but the operating expenses of the mining companies do not change.
Income that is cut almost in half, while expenses remain unchanged, is obviously detrimental to any business.
This situation removes the most inefficient miners from the network. As a result, the difficulty drops and the most efficient miners become more profitable. This free market process eliminates miners who are forced to sell the most bitcoins to cover their expenses and rewards the most efficient miners by giving them more bitcoins.
The miners’ capitulation process occurs until the selling pressure has significantly diminished. As the price falls, the selling pressure disappears exponentially as the most inefficient miners (forced high sellers) are removed from the network.
When can the mining capitulation occur?
The most obvious form of mining capitulation is halving. A 70% reduction in selling pressure, as estimated by Blockware Solutions, clearly had a massive effect on the market price of bitcoin.
However, this ineffective miner purge occurs naturally over time and especially around price drops.
New efficient miners are constantly coming online (better ASICs, lower electricity rates, fully funded publicly traded mining companies, etc.). The most inefficient miners are eliminated when difficulty increases, electricity rates rise, or prices fall.
Examples of simplified mining capitulation fund
The first model assumes a maximum hash rate and a bitcoin price of $ 60,000.
Looking at the model, the mining network is divided into five different layers.
The first layer is the most efficient and represents approximately 20% of the total network. This would likely consist of publicly traded companies such as $ RIOT, $ MARA, and $ HUTMF that have access to unlimited amounts of capital available on public markets and that you don’t have to sell bitcoins.
The fifth layer is the most inefficient and also represents about 20% of the total network. At the current bitcoin price, your operating expenses are roughly 80% of your income (bitcoin mined). This means that their margins are very sensitive to falls in the price of bitcoin, increases in the price of electricity, increases in rent and increases in the difficulty of the network.
Now let’s look at the second model. In this model, the price has dropped from $ 60,000 to $ 35,000 and the hash rate has also dropped by 20%.
Now the fifth most inefficient layer of the network has been removed. Due to the sudden drop in the price of bitcoin, layer five operating expenses ($ 41.4 million) now exceed the amount of bitcoin they can mine ($ 37.8 million). This causes them to close their operations and the remaining layers get a higher proportion of the hashrate.
The interesting idea here is that the USD denominated selling pressure decreased by 40%.
Finally, let’s look at the third model. In this model the price has dropped from $ 60,000 to $ 20,000 and the hash rate has also dropped by 40%.
The fourth and fifth layers of the network have now been removed. Due to the sudden drop in the price of bitcoin, the operating expenses of both layers now exceed the amount of bitcoin they can mine. This causes them to close their operations and the remaining layers get a higher proportion of the hashrate.
The interesting idea here is that the selling pressure denominated in US dollars decreased by 70%.
Hash tapes are an indicator that helps measure miners’ capitulation.
While the hash tape indicator is not perfect, it can illustrate points in bitcoin’s history where the selling pressure begins to wane exponentially.
When the selling pressure starts to wane exponentially due to the falling hash rate dynamics, we can be more confident that Bitcoin has bottomed out.
Another interesting aspect to highlight is that the indicator never approaches the maximums (2011, 2013, 2017). As the price begins to fall after each local top, the hash rate continues to increase. Since the hash rate keeps increasing as the price falls, the selling pressure is likely to build across the network until the miners capitulate and signal the bottom during a bear market.
This is how deep bear markets happen. The price is overheated so the network, users and miners can manage sustainably. When the price momentum changes, miners are still deploying because it is still very profitable to mine bitcoins. Then you get a period where negative price action drives away new buyers, but more sellers (capitular miners) still appear as more miners are deployed and network difficulty increases.
Given that bitcoin is the best monetary good ever created and we are watching the world begin to monetize it, it is probably a fantastic idea to rack up more satellites when it starts to run exponentially in short supply, as indicated by the hash tape funds. This is about to happen again for the twelfth time in history.
TLDR – Use hash tapes to time bitcoin purchases when the price has dropped and the selling pressure is likely to drop exponentially as well.
This is a guest post from Mimesis Capital. The opinions expressed are entirely my own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.