I know not so many would sit back and try to consider the source of their crypto holdings. It is somewhat necessary to at least have some idea about what really happens. Like in the case of the ordinary currency that gets printed or minted, cryptocurrencies are never created through this procedure.
In cryptocurrency, a team or a consortium comes together. They then initiate the use of blockchain technology alongside cryptography in the creation of a new currency. It is all about cryptocurrency mining. To be able to elaborately understand the process of crypto mining, it is important to look into an example scenario. Majority of cryptocurrencies are created through the process of mining.
In a miner capitulation situation, as prices go down, some miners are often forced out of the network. What this means is that they will have to sell the reserve bitcoins and it will automatically force a further price fall. There is no doubt, this always has a drastic effect on crypto values. But how is this even possible? Let’s first try and understand what miner capitulation is all about.
Buying and selling crypto always appears to be complex for any beginner. But the most important aspect is the intent to make profit from the selling and buying of crypto. Before the selling or the buying business, the cryptocurrencies must be generated through a mining process.
Typically, a number of computer systems will be put to task in racing towards the completion of an easy though inefficient equation. The main agenda is to earn a cryptocurrency reward. During such an activity, the major cryptocurrency blockchains like Bitcoins, Litecoin, among others, follow through this process. Each user is then rewarded by the respective crypto coin if they manage to validate first.
Taking for instance, Bitcoin, the miners come together to work in pools by trying to solve mathematical puzzles. This procedure then involves the use of computers which in cryptocurrency refer to nodes. These cryptocurrency nodes have some special chips. Each miner who manages to solve the mathematical puzzle first are then rewarded with a Bitcoin which remains to be part of their owners.
With a complex mining process as this, the transactions within the cryptocurrency network are therefore confirmed as legit. Bitcoin is more advantaged from the fact that it operates on a dedicated network system. Other cryptocurrencies operate on a shared network system.
What Happens in Miner capitulation?
In Bitcoin trading, the miner’s profitability level is hugely dependent upon the price of Bitcoin and the cost spent to purchase electricity to mine. So, when the price of Bitcoins drops, the less productive miners are forced out of the network. Reason being, the bitcoins earned by those miners aren’t worth the cost to mine.
Many miners tend to store part of their Bitcoins for the attainment of maximum value in a bull market. Any miner would never wish for this situation to go to a worse scenario and sustain a further price drop. For such cases would mean a continuous selling pressure on the price of cryptocurrencies. The lower prices have a potential to put off even more efficient mining operators until there can be none left.
Reason behind the Occurrence of Miner Capitulation
In the cryptocurrency market, when mining is no longer profitable, miner capitulation occurs. With the falling prices of say Bitcoin, their profitability drops and the miners are compelled to sell off their Bitcoin holdings.
A major factor that affects the cost of a cryptocurrency to mines is the cost of electricity as well as the relevant tax implications. Remember this is particularly rested upon the geographical location. The cost of a mine may ever get altered depending on your location and country.
For this reason, China is mostly advantaged and has the highest number of miners concentrated in this region. The cost of electricity is low in China alongside a relatively affordable rent, cheap technology, and efficient resources, especially labour. But the cost of electricity seems to be the major factor that will definitely determine the average cost to mine Bitcoin.
In other news, it has also been observed that there is likely to be a sudden price drop in prices of cryptos. This is because miners are operating with long-term perspectives as well as strategies. The miners tend to operate on a much more long-term perspective.
The Drastic Effects of Miner Capitulation on Crypto Value
As the level of profitability drops, miners are compelled to sell their Bitcoin owning and holdings. This selling pressure leads to a worsening response to the market sentiments. Once miners start to sell off their cryptocurrency holdings, a significant selling pressure is automatically created in the crypto market. This sort of pressure establishes a difficult arena for major cryptos like Bitcoin to maintain its momentum.
While the large mining centres have an advantage as they are unlikely to capitulate from a short-term slump. The smaller mining companies hold shorter electricity contracts and may begin closing down one after the other. You see, the large mining firms hold long-term contracts with their electricity providers. And have more capital to deal with market instabilities. This sort of an advantage is not reciprocated to smaller mining centres.
There is however a situation of a never-ending spiral that happens as history keeps repeating itself. When the inefficient miners are left out, from the effect of short-term price drop, the major miners are not hugely affected. With all the inefficient buyers gone, the selling pressure fades away and stabilisation jets in.
What this clearly means is that the inefficient buyers’ hardware is therefore purchased by the more efficient miners who remained in business. This hardware is put to use again and with time the hash rate difficulty back up once more. So, in the end it is a never-ending situation.