Jamie Coutts CMT
Jamie Coutts CMT 6 minutes reading from Bitcoin

The Bitcoin Network is Gearing Up for a Massive Merge: Mining Industry Analysis

The BTC network is undergoing a massive transformation. On the one hand, hash rate tells us the network has never been more secure. This makes it very cheap on a hash multiple. But there concerns; structural decline in fee revenue and potential consolidation

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The relentless advance of hashrate, which has compressed revenue generation across the industry, has resulted in the asset trading on a network-security multiple near historic lows

Its been remarkable move since China's ban is extraordinary due to 1. utter disregard for the price 2. surging energy prices 3. the near-collapse of the industry's largest and listed miners.

We previously explained that equipment delivery cycles/planned expansions, operational efficiency improvements and new sources of renewables are likely reasons for this phenomenon

In Dollar terms and in terms of % of inventory by miners (ex Satoshi stack) we are seeing the biggest purge in Bitcoins history. Since July 27, miners accounting for 95% of the network hash sold 17,500 BTC (17% of total) or 270 million in selling pressure.

If we follow the 2018 analog, the current price collapse through key price support at 17,000-18,000 could prompt further selling from marginal miners, catalyzing a capitulation low in the coming weeks.

Although whatever downside may still yet to come, it would appear much more limited than in 2018 as we have already seen some outsized realized losses over the past 2 weeks since FTX meltdown. Covered here

Jamie Coutts CMT on Twitter

US Liquidity has turned up for the first time since July-21 (its been bearish since Dec-21)!

But the mining industry is still facing a structural decline in profitability, pointing to a hyper-competitive industry ripe for consolidation. 30d avg daily rev (block subsidy+fees) = 17.1m (⬇️ 72%). Based on current trajectory, it's could go under 15m/day in this cycle.

Revenue per exahash (pink), now at 59,654, has broken 2020's lows, and appears to be heading lower.

The conclusion from both metrics; the industry is incessantly sourcing cheaper forms of energy (typically of the stranded and renewable variety) plus ongoing operational efficiencies driving

⬆️ hash & creating intense ⬇️

pressure on profitability through each cycle.

While marginal miners are in stress, for asset owners, the end result is a decentralized monetary network trading near the lowest market value to hashrate multiple in its history.

But as the industry recovers in 2023 onwards, we are likely to see consolidation (uncomfortable from a decentralization standpoint) and bigger players (Big Oil?) and more debate around the adequacy of the fee structure to support the miners (not saying good or bad, just likely)

This post is based on this twitter thread.

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