Miners are an interesting phenomena in the world of cryptocurrency.
They’re needed to secure Proof of Work networks, but most of them have high bills to pay so they don’t wait around to get the highest price before they sell. Steve Englander, a currency specialist for Citigroup, has noticed the impact this trend has on Bitcoin pricing.
“Bitcoin mining has evolved from cottage industry to heavy industry over the last couple of years and mining equipment has become very expensive. This may add acute instability to Bitcoin price dynamics because of an imbalance between supply and demand…If miners pay out a lot for their equipment, the more the initial outlay, the bigger the incentive to sell quickly any Bitcoin that they mine into the market in order to recoup their investment. So we have daily transactions volume of 60-100k in recent months, with volumes higher in periods of falling bitcoin prices. Many and possibly a majority of these transactions are shuffling Bitcoin between wallets. About 3.5k Bitcoin are mined daily. If the miners are a steady source of supply and there is no increase in final demand we have this overhang of Bitcoin being sold into the market. In consequence we have downward price pressures. This may change if there is some pickup in demand for Bitcoin, but for now we have miners looking to sell and not much of anyone looking to buy. The market structure I am describing inherently generates extreme volatility. Bitcoin advocates often describe volatility as a growing pain but in fact the cost structure of Bitcoin mining may make this volatility inevitable,” he wrote.
His thesis states that the constant selling of coins will reduce the price, unless demand rises. This can be seen with most altcoins that employ Proof of Work as well. The miners have a disconnected view of the market in many instances. They are in no position to hold or horde coins because of costs. Therefore they literally dump on the market whenever they can.
If they dump when there are no buyers, the price suffers a depressive effect.
Long-Term Bitcoin Holders Can Buy The Oversupply At A Discount
This seems like a great opportunity for long-term holders to sop up that excess demand at lower-than-usual prices. If demand rises (which it can based on numerous large entities who are now entering the space), a gradual - and progressive - price increase might just occur.
Further, Englander’s report doesn’t touch upon a longer-term time horizon. Within 24 months Bitcoin’s block reward will halve. That will exert an upward pressure on the price as well.
The fact so many companies and people want to mine Bitcoin shows how popular and profitable the pursuit has become. An ‘arms race‘ to mine Bitcoin is essentially what is causing the current over-supply. Equipment keeps on getting more powerful and efficient. Still, it seems easy to envision a supply of 3,500 Bitcoins being easily absorbed if more multi-national companies start accepting Bitcoin for payments. If larger payment processing gateways get in on the act, the demand could explode overnight.
Naturally, if the price continues to rise, the mining operations will continue to outfit their equipment to mine faster and faster. The arms race won’t end anytime soon.
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