Capitulation Is Still To Come…
Swept under the rug; seemingly forgotten.
TLDR:
Pain is in the forecast.
Let’s Talk Reality
For months now the broader bitcoin community (as well as the traditional finance community) have been pounding the table, screeching, “the Fed has to pivot!” with any assortment of justifications as to why our boy Jay Pow needs to turn the printer back on. Aside from the many circular discussions around why anybody thinks his hand is forced as we stand today (it isn’t), there’s a dynamic that I wanted to briefly discuss that has seemingly been swept under the rug.
It would seem, from my own dark little corner of the very niche and broader corner of Twitter known as “bitcoin twitter (‘BT’ for short),” much of the space seems to have a false sense of confidence believing that we’ve already seen miner capitulation. The reality could not be farther from this. While we have seen some capitulation occur this year with the events around Compass Mining and the fallout of the 3AC, Celsius, and LUNA events causing far-reaching liquidations; I argue that any selling of equipment on the cheap from these events does not qualify as a capitulatory event. When we are referring to a macro capitulation event, we are talking about difficulties that sweep across an entire industry and cause pain to the vast majority of the competitors (if not all).
What determines miner capitulation is going to be a myriad of variables (as does any macro event), but I believe much of the market is focusing primarily on public sentiment vs reality & data. This has been a popular dynamic these last few years in particular due to, in my humble opinion: (1) saturated communication capability with the prevalence of smartphones and social media, (2) a large portion of the population having taking significant amounts of time to improve their understanding of the world during lockdowns, and (3) a swelling of interest in trying to understand why life in developed nations has gotten so expensive.
When it comes to the topic at-hand, we have not seen any considerable capitulatory events. There haven’t been any major miners throwing in the towel, even after the Compass Mining debacle, the industry is still very much intact and not bleeding. However, it is in my opinion that we are now approaching an environment where the likelihood for blood swells.
As the first image shows, the bitcoin network hashrate just continues to chug like an absolute monster — reminiscent of a particular little blue steam engine. What does this also mean? That the difficulty-rate that all miners hash against is also going to be chugging along to higher altitudes, for one. What also needs to be considered is the relationship to ‘Hashprice’ (coined by Hashrate Index); which is the amount of value that a “specific quantity of hash” is capable of generating (in dollar terms), which requires the input of where bitcoin is trading against the US Dollar ($USD).
What this means is that as bitcoin continues to trade lower, Hashprice will follow, meaning the potential profitability of miners continues to slide lower.
What this yields is an environment where miners have to work harder for their bitcoin while they are receiving diminishing revenue from operations. Meanwhile, at the very same time some of these players have not only taken on debt, but have also collateralized their hardware for cash-in-hand.
What this all translates to (in my opinion) is: fragility. Keep in mind that these dynamics are all also playing out while the cost of energy is on the rise, and transmission infrastructure is lacking. Meaning that while some of these projects have significant backlogs in the amount of hashrate that is waiting to come online, particularly within ERCOT, by simply looking at the sheer size of the flood of interest in bitcoin mining for multiple reasons including in particular load balancing, there’s also the fact that the infrastructure itself is causing a significant bottleneck even further. And then, while these projects are waiting for their time to come there’s also the matter that global energy demand is ratcheting up as supplies are constrained alongside general commodity supplies being constrained, with the supply & transportation industries seeing their own constraints themselves!
Conclusion
The bitcoin space has not seen blood in the streets yet. Yes we’re down roughly 70% from the highs, but we haven’t seen a significant turnover in the players — yet. With the Federal Reserve set to continue applying pressure to Legacy Markets as they attempt to slaughter demand; risk sectors take hits. Meaning that bitcoin price is *likely* to also take its own hit (yes even further), meaning that our beloved miners are on-track to shoulder even further punishment for the short to medium term — what I would believe means into 2024. If that future comes to pass, I think we should expect to see one or more of these participants throwing in the towel, whether that means Chapter 11 I surely don’t know.
The only thing that can stave off this future I believe would be a geopolitical superpower announcing either; (1) national adoption of bitcoin as a legal tender, or (2) accepting trade for goods/services-rendered to be paid in bitcoin due to volatility, doubt and uncertainty in global foreign exchange currencies, as well as lack of desire to park capital with government debt and sovereign credit risk (h/t to The Four Horsemen; Lawrence Lepard, James Lavish, Greg Foss and Preston Pysh). Seeing how the $USD (that’s The Dollar) has become an absolute blackhole for competing fiat currencies (h/t to Brent Johnson for his Dollar Milkshake Theory), I see potential future #2 as more likely, but second to the capitulation of miners.
The most likely outcome (to me) is that the geopolitical world will dissolve further into uncertainty as globalization restructures around reality, and as The West is forced to confront our own stupidity & ignorance around energy, food, public health, and general resiliency. For now, expect a world of pain and discomfort.
A Dash of Inspiration…
Just know that accepting this reality and focusing on making sure you’re breathing, and putting one foot in front of the other, and keeping your mind’s eye on what you’re going to do once the storm clears… time will fly in a way that you cannot fathom. Get obsessed with loving the grind, and perfecting your craft, and you may come to enjoy (and thrive) during one of the most painful and uncertain times in recent history.
