At the beginning of July, the Bitcoin network’s hashrate drawdown, a metric of relative changes in the network’s overall computing power, sank to levels not seen since the December 2022 bear market. This suggests that some BTC miners are starting to capitulate.
Back in April, Bitcoin successfully underwent its fourth halving event at block height 840,000, cutting the reward miners receive per block found in half to 3.125 BTC, essentially halving their largest source of revenue. Miners receive rewards along with transaction fees when they find a new Bitcoin block, but data shows fees only account for less than 10% of revenues.
Adding to that, Bitcoin’s price recently dropped below the $60,000 mark as selling pressure from German authorities grew and the rehabilitation trustee for the defunct cryptocurrency exchange Mt. Gox started repaying creditors in both Bitcoin (BTC) and Bitcoin Cash (BCH). It has since recovered to around $65,000.
Speaking to Cointelegraph, Oleksandr Lutskevych, founder and CEO of cryptocurrency exchange CEX.IO, pointed out these stats and the fact that trends like Runes and Ordinals have “cooled significantly since their introduction.”
In addition, Lutskevych said that onchain activity on the Bitcoin network has been either stagnant or declining for the better part of the last two years, which, to him, “could mean hash is more centralized via larger mining operations, whose desire to avoid potential losses could lead to greater network instability during uncertain conditions.”
He said the decline in unique active addresses could be “a reflection of retail participants ceding ground to corporate entities,” which are entering the space at a growing pace thanks to the spot Bitcoin exchange-traded funds (ETFs) launched earlier in 2024.
Yet, despite all of these bearish conditions, Marathon Digital Holdings — the world’s largest BTC mining firm — didn’t sell a single Bitcoin in June. According to its operations report, it kept its 18,536 coins untouched.
What to make of the hashrate drop
As mentioned, Bitcoin’s hashrate drawdown has dropped to levels that hadn’t been seen since December 2022. The last such decline happened after the collapse of FTX, with the price of Bitcoin hitting an $18,000 low.
Speaking to Cointelegraph, a spokesperson for Bitcoin mining pool operator ViaBTC said that while hashrate dropped, its decline wasn’t as substantial as the one seen during the bear market, and its impact on the network and miners “is relatively minor.”
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They added that, since the halving in April, the network’s hashrate has consistently remained around 600 exahashes per second (EH/s), far above the 250 EH/s seen in December 2022 and “highlighting a notable improvement in hashrate over time.”
Brian Rudick, senior strategist at crypto trading firm and liquidity provider GSR, said that Bitcoin’s hashrate dropped as mining profitability went down after the halving, adding that hash price, a metric measuring the revenue potential of a unit of Bitcoin’s hashrate, is now “sitting at an all-time low.” Rudick added:
“That said, it is not surprising that some public miners have continued to hodl, as public miners generally have a lower all-in cost per coin than the network as a whole and as they shored up their balance sheets via debt repayment and at-the-money equity offerings prior to halving.”
He emphasized that while public miners are adding hashrate to take on additional market share, the “less efficient, non-public miners are being forced to unplug unprofitable machines.”
ViaBTC’s spokesperson told Cointelegraph that the hash price has “indeed seen a significant decrease.” According to ViaBTC’s profit calculator, in December 2022, amid Bitcoin’s price plunge at the height of the bear market and considering mining difficulty and block rewards ahead of the halving, the daily revenue miners managed per TH/s was about $0.05.
The spokesperson added that after the Bitcoin halving, when BTC prices jumped along with a 140% increase in hashrate, the daily revenue per TH/s remained at around $0.05. The recent price drop saw that figure drop to $0.04, a “new low in recent years.”
Despite these drops, experts were quick to shrug off fears of a so-called “miner death spiral,” a theoretical consequence of miner capitulation.
The “miner death spiral”
A miner death spiral, as Lutskevych put it, is “a theoretical concept where the inverse relationship between miner rewards and energy requirements causes a network to collapse when incentives no longer cover costs.”
In other words, it’s the theory that if miners start capitulating after a significant price drop or rise in hashrate, the network could crumble. He added:
“In such a scenario, network fees would spike while throughput ground to a halt, resulting in frustration and inconvenience for transacting participants. However, it’s important to note that such an event is yet to occur in a practical sense.”
Lutskevych said that a death spiral isn’t likely to occur because the Bitcoin network has a built-in mining difficulty adjustment mechanism that accommodates the network’s capacity, meaning that when the hashrate drops, the difficulty level drops as well to encourage other miners.
ViaBTC backed this up, adding that if miners did start capitulating, the difficulty adjustment would reduce mining difficulty to ease competition, increasing the rewards for those who kept on mining, even if with the same hashrate, as it would increase the hash price.
This boost, the firm’s spokesperson added, could attract new miners and additional hashrate to ultimately achieve a “dynamic balance.” The spokesperson added:
“In essence, mining is a long-term investment endeavor. When miners start, they commit substantial time, capital and resources. Their strategies typically span extended periods rather than short-term durations.”
Lutskevych said that a greater concern could be miner centralization, as the “fluctuating risk appetites among dominant players may help explain the sudden drop in hashrate” alongside summer heat and storms impacting key mining regions.
ViaBTC added that the appetites of dominant players may lead to short-term fluctuations. Miners don’t have to sell their BTC as soon as they mine it and can opt for more favorable prices by covering liquidity needs with services such as crypto-backed loans.
A falling hashrate, however, could also point to falling prices. Popular Bitcoin proponent Max Keiser has famously said that “price followers hashrate” to back his bullish BTC price predictions.
Does Bitcoin price actually follow hashrate?
Historical data seems to suggest that Bitcoin’s price and hashrate are somewhat correlated, as both have been rising in tandem for the better part of the last decade as cryptocurrency adoption exploded.
To Lutskevych, there’s a “slight lag between Bitcoin’s price and hashrate,” but he added that this recent price drop “wasn’t accompanied by a significant price decrease that matched the severity of past events.”
Rudick said that the network’s hashrate and the price of BTC have been positively correlated, as “a higher price makes mining more profitable and attracts additional hashrate to come online.”
However, he added that Bitcoin’s price doesn’t necessarily follow its hashrate; instead, it leads it. This means he doesn’t foresee the hashrate drop affecting the cryptocurrency’s price and isn’t concerned about its security, as the network has “more than enough hashrate” securing it.
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Rudick added that while “there is the potential for turmoil in the mining industry to eventually call attention to Bitcoin’s Achilles heel in its declining security budget,” that point isn’t close yet.
Indeed, data shows that, in order to control the network’s hashrate in what’s known as a 51% attack, bad actors would need to spend well over $1 million per hour, provided they could wrestle other Bitcoin miners for the necessary hardware.
Rudick said there are “solutions to Bitcoin’s long-term security budget challenge,” such as increasing block space demand by “adding compute capabilities via layer 2s.”
While the hashrate may be dropping over a plethora of factors, the network’s security remains assured, pointing to the recent decline as a potential bottom signal. That signal is supported by other metrics, including Bitcoin exchange reserves and miner reserves, all of which suggest low selling pressure.
