The mining process
Friday, according to some estimations, the mining difficulty would decrease by approximately 27% as the network works to regain lost processing power lost due to China’s restrictions on mining two weeks ago.
The change should have no effect on the price of bitcoin, which is determined by supply and demand, whereas miners’ role is to add transactions to the blockchain. Bitcoin mining companies, on the other hand, may be set to benefit significantly.
“The miners are rubbing their hands in anticipation of this Friday,” B. Riley Securities’ Lucas Pipes said. “If you have a bitcoin mining machine set up right now, you’re making money by the bucketload. This coming Friday, you will earn slightly more money.”
According to Jaime Leverton, CEO of Canadian crypto mining firm Hut 8, this will be the largest difficulty drop in bitcoin history. She believes that such a large difficulty adjustment would be unusual during a bitcoin bull run, which is how she sees the current market. However, it is all related to China’s two-week-old crackdown on mining operations.
“The public markets haven’t realized the value of this event for these companies yet,” said Ethan Vera, chief operating officer at Luxor Tech, a blockchain company that runs bitcoin and other digital coin mining pools, referring to China’s crypto crackdown, “but it’s going to be reflected in their financials this quarter.”
What is the level of difficulty in adjusting?
Mining difficulty measures how difficult it is for miners to solve the complex cryptographic puzzle that earns them a bitcoin reward.
According to Vera, there are currently 144 blocks, each with 6.25 bitcoins, implying that 900 new bitcoins are rewarded on the network each day.
When there is more computing power, miners find blocks faster, and the network begins to issue more than 900 bitcoins per day. The Bitcoin protocol regulates this by adjusting the difficulty for miners to find a block, allowing the rate to return to 144 blocks per day.
What is causing this to happen now?
Vera explained that the same thing happens in reverse. When there is less computing power competing in the Bitcoin network – as there is now as a result of the Chinese bitcoin mining exodus – and miners find fewer than 144 blocks per day, the difficulty decreases, making it easier to find blocks.
When the Chinese government cracked down on mining operations in the country, the Bitcoin network lost roughly half of its hashrate, or the computing power required to mine bitcoin. Between 65 and 75 percent of the world’s bitcoin miners were based in China.
“This is a really good environment for bitcoin miners in North America and anywhere else in the world that are still plugged in because it means we will eventually see a larger share of bitcoin mining rewards,” Leverton said. “From a revenue and profitability standpoint, this has an immediate upside for miners like ourselves.”
Miners make money by mining bitcoin and then converting it to fiat currency. According to Leverton, Hut 8 has historically only held bitcoin and has not sold any of it since January. According to Leverton, the company currently has over 3,800 bitcoins on its balance sheet.
Pipes, who covers Riot and Marathon for B. Riley, believes crypto mining firms in general have the potential to outperform in the second quarter because they are earning more bitcoin than many people expected just a few weeks ago.
“There are miners that are producing today – they have miners hooked up outside of China – and there are miners that have the potential to take in more miners that are looking for a home; they’re well positioned to grow a lot from here,” he said.
The benefits of the highly anticipated difficulty adjustment should be reflected in the market “instantaneously,” according to Pipes, though whether the market is fully efficient today is unclear.
“I would say there is still a lot to learn about understanding these business models inside and out,” he said.
According to David Grider of Fundstrat, the difficulty adjustment will benefit companies’ financials in the long run.
“Crypto mining stocks are higher beta plays to bitcoin, and their performance has sometimes led bitcoin,” Grider explained. “Most cryptocurrency mining stocks peaked relative to bitcoin in late February and March, before bitcoin peaked in mid-April.”
“Since the bitcoin sell-off, most crypto mining stocks bottomed in May and have outperformed bitcoin,” he added. “That could be a sign that some money is preparing to return to it, but it could also be a sign that public equity money is beginning to flow there and could be flowing into the crypto assets themselves.”
Will Bitcoin end the year below $35,000?
According to 44 percent of survey respondents, the world’s largest cryptocurrency will end 2021 with a value less than $30,000. That is essentially where the year began. According to Coin Metrics, Bitcoin rose by triple digits to an all-time high of nearly $65,000 in April, up from around $29,000 at the end of 2020.
However, after a strong start to the year, bitcoin was hit by increased regulatory scrutiny and lost the majority of its gains in 2021. Bitcoin was last trading at $33,400, up more than 10% on the year.
The drop occurred as China increased its efforts to combat crypto speculation, ordering digital currency miners to cease operations in a number of regions and advising banks and payment firms not to provide crypto-related services. Meanwhile, Binance has been barred from operating in the United Kingdom by the country’s markets regulator.
Nonetheless, the cryptocurrency has gained mainstream acceptance from major banks and brokers. Many notable investors, including Paul Tudor Jones, have also endorsed bitcoin as a preferred inflation hedge.
When asked to name their favorite inflation trade, 18 percent of survey respondents chose bitcoin, which is more than double the number of investors who chose gold, a long-standing inflation trade.
Bond yields have risen in response to the economic reopening and inflationary pressures, reducing the appeal of non yielding bullion.
“If they test $30,000 and hold, you could get a significant bounce because the shorts capitulate,” said the veteran Wall Streeter, who is also the director of NYSE floor operations for UBS. “If you break $30,000, traders will be looking to see if there is a trapdoor, cascade sell-off that follows.”
Cashin believes that the price action in bitcoin, which has struggled since reaching an all-time high of nearly $65,000 in mid-April, could have an impact on broader market sentiment.
“All of that will influence the speculative feel in stocks, particularly these chat-room stocks,” Cashin said, referring to companies such as GameStop, AMC Entertainment, and a slew of others adored by Reddit traders at various points.
Cashin also shared his thoughts on the S&P500 as the market enters the second half of the year.
The broad equity index rose 14.4 percent in the first six months of 2021, closing at 4,297.50 on Wednesday, its fifth consecutive record high.
“I think we’re in reasonably good shape,” Cashin, who joined the New York Stock Exchange in 1964, said.
“We should be heading into a seasonal rally here into the middle of July, if not the third week,” he added. “The second half can be challenging. The third quarter, especially near the end, can be choppy. However, the short-term outlook appears to be favorable.”
According to Cashin, there appears to be some uncertainty on Wall Street about whether value or growth stocks will take the lead.
“I think that’s why you’re seeing the market start to narrow a little bit here,” he explained. “Traders are wondering, ‘Is there really a rotation from one area to the other, or are we just milling around waiting for a new group or new topic to emerge here?’”