It is public knowledge that cryptocurrency is a new currency type that aside from being…
Miner Capitulation and its Effect on the value of Bitcoin
When bitcoin features anywhere, people who know a thing or two about it will always pause to listen. Listen not for fancy reasons but also just to catch up on the current trend of cryptocurrency that has caught the world by storm. There is always something worth learning about bitcoin as a pioneer cryptocurrency alongside altcoins which continue to emerge each day.
The popularity of Bitcoin as a leading cryptocurrency has been witnessed in the past few years. Although the initial idea behind its creation was to provide an alternative use to the existing fiat currencies, bitcoin has developed to become a major source of transaction globally. Investors generally use Bitcoin as an alternative investment, helping to diversify a portfolio other than the bonds and stocks while others rely on it simply as a means of payment.
Bitcoin is undoubtedly a ground-breaking technology, and in 2022 it poses significantly less risk than it did in 2012. It is however important for investors to understand various elements associated with Bitcoin value. One of such factors is embedded in the concept of Miner’s Capitulation. In order to understand this concept, I will give a brief explanation.
Miner Capitulation Explained
The Bitcoin standing and value revolves mainly around a number of parties who include the investors and HODlers. However, it also relies on the BTC miners. Although reliance on the wider market cues can assist Bitcoin enthusiasts understand the dynamics involved here, it is also important that they rely on the miner’s behaviours. Currently, the miners have the responsibility of creating a platform to sail Bitcoin through the bear market.
So what is miner capitulation? Bitcoin miner capitulation takes place when the least efficient miners struggle to meet their costs of operations. When a miner faces such an unfortunate situation, they tend to sell huge amounts of their mined Bitcoin.
In Bitcoin, the profitability for miners is often a function of the Bitcoin price as well as the costs of the miner to buy electricity to do the mining process. Should the prices fall, the less efficient miners find themselves forced off the network. This is based on the fact that the Bitcoin they mine is not worth the cost to mine. Majority of the miners will then resort to keeping a portion or all Bitcoin they mine with the intention of selling them when the prices rise. The situation may induce a more downward pressure on the market as well as the price of the Bitcoin drops further.
How miner capitulation affects the Bitcoin value?
As a Bitcoin investor, it is recommended that you better understand the effects of capitulation. Although many suggest that miner capitulation can cause a situation known as a death spiral, experts argue that such an effect can never happen and has never taken place despite many historical examples. In an event that the less sufficient miners are unable to meet their operational costs, large mining companies that have huge funding can weather the hard times presented and continue mining.
Considering the practicality of the concept, the difficulty of Bitcoin mining normally adapts the expense of mining Bitcoins to the market conditions. Broadly, when the harsh rates fall, such a challenge renders it easier to mine Bitcoin. Consequently, many miners come into the mix and prevents capitulation. As such, miners are still able to get the opportunity to store their Bitcoins in reserve to avoid selling them at the bear market.
Forcing the inefficient miners off the network does not therefore affect others much, as the harsh rates and difficulties can stabilize afterwards. More productive miners might buy the hardware from the unsuccessful inefficient miners and utilize it to increase difficulty and hash rate. This is the reason why historical difficulty tends to increase. Although generally, investors should know that the Bitcoin mining profitability is a subject of several factors.