Bitcoin is stuck in a relentless sideways channel, with the historically volatile asset proving considerably more stable than the global stock markets.
BitMex’s Bitcoin Volatility Index, which tracks measures the 30-day historical volatility of Bitcoin against the US dollar, is hovering close to 18%. Only three months ago, it was as high as 85%.
This, coupled with sluggish trading volumes, is proving a concerning combination for bitcoin’s future prospects.
Forever sideways… When will BTC breakout? – Source: currency.com
On the one hand, bitcoin has tended to surge in value after an extended period of volatility, but on the other hand, a lack of investor interest could create a negative feedback loop as more and more people withdraw from their positions.
Besides, if 2022 has taught us anything, it’s that we can’t rely on previous norms.
While the world’s largest cryptocurrency remains glued to the US$19,000 to US$20,000 range, there could be one other fundamental factor to be wary of: Bitcoin mining difficulty, which just hit record highs.
Difficulty goes up, bitcoin goes down – Source: blockchain.com
A measure of the total amount of power being used to secure the Bitcoin network, mining difficulty is a double-edged sword: On the one hand, high difficulty shows that the network is highly secure; on the other hand, it means smaller rewards for the miners doing all of the work.
Could today’s record high spell bad news for investors praying for the next bitcoin bull run?
Only the brave stand to weather the crypto winter
“The easy answer is yes- increased difficulty means less earnings for miners, forcing them to sell bitcoin to pay for power,” said Phil Harvey, chief executive officer of digital asset management consultancy Sabre56.
As a manager of over one gigawatt of crypto computing power and 25,000 servers, Harvey is in touch with ongoing mining trends.
“Growing bitcoin trade volume, or at least one sustained on a high level, decreases bitcoin price - establishing a negative feedback loop, where even more of the devalued bitcoin needs to be sold into the market. It is a perfect storm.
“As difficulty increases, less-profitable miners will be forced to shut down. Typically, we see this in a mining down market after a few months, as miners sell all their bitcoin to weather the storm,” noted Harvey.
But reduced revenues serve a valuable purpose in their own right: “This may not be a popular observation, but bitcoin mining revenue needs to stay at current levels until the next halving event in 2024 - weeding out uneconomic miners.”
Given the industry’s trajectory, Harvey reckons only the fittest will stay in the game as mining revenues decline, but it’s more nuanced than that.
Trimming the fat from the global network of miners means that even though 'revenues per energy' output will drop, 'revenues per miner' are likely to stay within the historical range of US$200 and US$1,000.
Thriving in this ultra-competitive and unpredictable industry requires a certain mindset and the onboarding of risk.
In Harvey’s view, publicly listed miners deploying capital and preparing machine deployment with comfortable lead times, while buying distressed assets, are doing this correctly.
Alternatively, greedy market participants who failed to deploy machines and bought recklessly in better times, are struggling due to poor planning and execution.
“Unrealised revenue from delayed deployments, a high cost of capital, and overpriced equipment will cause their demise,” predicted Harvey, pointing to bankrupt miner Compute North as a case example.
Since “greed is rife in the industry,” Harvey reckons we could see many more bankruptcies down the line.
So it looks like bitcoin is experiencing downward pressure from a melange of antagonists right now, but as for the mining sector, sobering prices could force it to mature once and for all.
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