Crypto markets have had some very volatile months, even by crypto standards. The year started with a spike in inflation shortly followed by the war between Russia and Ukraine, causing the price of Bitcoin to pull back significantly from the $50,000 level it was at at the end of 2021. This recent series of events has had a negative impact on the mining industry. .
The industry has grown tremendously, driving competition and raising the hash rate to sustained levels never seen before. These low prices have affected the profitability of the mining industry and as a result, miners’ reserves have dwindled, which can cover the day-to-day costs of businesses. Additionally, we will explore China’s crackdown on the long-term effects of mining by analyzing the current distribution of hash rates.
Quick reminder – hash rate is the overall power contributed by miners to securing a proof-of-work blockchain. This computing power is used to solve cryptographic algorithms (SHA-256 in the case of Bitcoin) to process transactions and achieve consensus in proof-of-work blockchains. This indicator is used to measure the security strength of a network, because the higher the hash rate, the more difficult it becomes for an attacker to try to exceed 51% of mining control.
As can be seen above, Bitcoin’s hash rate has skyrocketed over the past few years, currently reaching new highs at the 200m TH/s level. This is partly due to the growing popularity of the industry and institutions eager to participate in the changing market. As the hash rate increases, the competitiveness of mining also increases, making the industry less profitable for existing miners.
Mining reserves track the balance of addresses belonging to mining pools. Bitcoin miners appear to have sold off and decreased the amount of Bitcoin in their addresses, which has dropped significantly since the start of 2022. Currently at the lowest since 2011, the total amount of Bitcoin held by miners sits at 1.95 million BTC .
As noted above, bitcoin miner reserves have declined significantly, likely in direct relation to the robust growth of the Hash Rate. An increase in hash rate means a more competitive environment, reducing profits for miners. Likewise, the falling Bitcoin price is putting additional pressure on miners’ margins.
For these reasons, miners are likely to reduce their Bitcoin holdings to cover their short-term operational costs.
While miners who have held Bitcoin for years can still have an impact on Bitcoin’s price, data shows that the marginal effect they can have when selling has diminished significantly. The volume share relative to miners has steadily decreased, currently standing at around 0.97% of the total Bitcoin blockchain volume.
Apart from lower margins, Bitcoin mining has also undergone a major change in its structure following the Chinese ban last summer. This significantly changed the distribution of mining pools and their hash rate.
Mining pools aggregate hashing power between different miners to give them a better chance at block rewards and more predictable revenue. InTheBlock measures the hash rate concentration per mining pool.
The indicator above shows the hash rate distribution of mining pools over time. After 9 months since the mining crackdown in China, the effects are being felt. The once large bitcoin mining pools of Binance and Huobi have completely disappeared, currently both having 0% of the total mining hash rate distribution. The fall of Bitcoin mining pools associated with China has allowed new pools to develop. Between them is Foundry USA Pool, which has led the industry for the past 90 days after mining 2,267 blocks.
China’s Inner Mongolia region was once home to the majority of the digital asset mining industry. Shortly after the crackdown, businesses fled China and set up new permanent operations, Texas was a major beneficiary of this migration.
Subsequently, towns like Denton Texas, which after a devastating winter storm left the city in debt, felt the positive impact. Core Scientific, a publicly traded company, has reached an agreement with the city to establish operations on their natural gas-fired power plant and, in return, help secure repayment of their loan.
In conclusion, although miner reserves have decreased significantly over the years, they are not creating significant selling pressure that could negatively affect prices. The most likely cause for this decrease in holdings is their need to cover operational costs, which due to the high hash rate and low price may have a greater impact on them. Moreover, 9 months after the Chinese crackdown, strong ripple effects have been felt throughout the mining industry.
Foundry USA Pool, an associated pool in the United States, has dominated the space in the past 90 days for the first time. Finally, the United States seems to be on the way to becoming leaders in the mining industry with the adoption of new policies.
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