In this article we discuss the possibility of a continued bear market for bitcoin, what is likely to be causing it, and what it means to the backbone of bitcoin: the miners.

The price of BTC is down nearly 40% in the last week alone, plunging crypto deep into bear market territory. Source: bitcoinity.org

Bitcoin Tumbles into Sub $5k Range, U.S. Stock Market Opens Down 9%

Update: as of the publishing of this article, BTC had climbed back up above $5,000 to $5,073, and the S&P 500 had moved up from -9.5% on open to -5.5%.

Monday morning set the stage for what was likely to be another bloody week in both cryptocurrency and traditional markets, with the price of BTC falling firmly below the $5,000 mark on Monday morning. At 9:30 EST, U.S. stock markets opened to 8%-9% losses and trading was immediately halted as circuit breakers triggered market closures for 15 minutes. All this managed to happen even after the Federal Reserve cut interest rates to near 0% and announced plans for a new round of Quantitative Easing, or the buying back of treasury bonds to help inject liquidity into the failing market.

In the last 24 hours leading up to the stock market open, BTC had fallen close to 14%, rendering it now down 40% over the last 7 days alone. Gold was also down 4%, silver down 13%, and crude oil down 10%. The markets moved south on the heels of several announcements made over the weekend concerning progress of the coronavirus pandemic which has thus far killed over 6,000 people around the world and infected at least 169,000, with actual numbers likely being far higher. Although the spread of the virus seems to have been contained in China, the number of international cases is still skyrocketing, as can be visualized by this chart provided by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University:

Source: gisanddata.maps.arcgis.com

 

Whether it is a direct causative effect of the coronavirus or simply correlated with the devastating effect it is having on the stock market, the price of bitcoin seems to be inversely related with its spread, suggesting that it might not stabilize until worldwide panic created by the virus starts to subside. The oft-cited bitcoin trader PentarhUdi (also known as masterluc on social media) painted another bearish picture for bitcoin on TradingView earlier today, suggesting a worst-case scenario of BTC hitting somewhere between $1836 and $2406 by 2021 if a long-term downtrend starting in 2017 follows through:

Source: PentarhUdi on tradingview.com

PentarhUdi added the following commentary to his chart:

“Amid of global financial panic Bitcoin price aggressively attacks Weekly SMA200 and bottom triangle line of previous chart. I see this might not end as well as i thought. As bearish potential of global markets is huge.

So lets brainstorm whats gonna happen in bearish outcome.

What do we do? We suppose triangle broken downside.

This suggests FLAT correction in historical IV instead of triangle and adds at least extra year to IV to be completed.

So I transformed triangle into downward trend and turned log scale on.

I got bearish target between $1800 and $2500. In this case weekly 200 SMA will be broken and become resistance.

Many time and affords will require to break it up and make it support.” – PentarhUdi, TradingView

Miners Powering Down, Dropping Hash Rate

Interestingly, it wasn’t only the price of bitcoin that was down — the hash rate of the bitcoin network has also been on the decline, reaching its lowest levels since mid January. This is likely due to certain pools of miners shutting down operations because it is now no longer economically viable for them to continue mining bitcoin. This in turn will eventually bring down the mining difficulty of the network; although because the difficulty is only adjusted periodically, it is currently too high for the amount of hash power used in mining, meaning that block times are now currently at about 11 minutes per block as opposed to their usual 10. As a reaction effect, transactions are now being processed a bit more slowly than normal, causing the average transaction fee to double from $0.48 on March 8th to $1.05 today:

Source: bitinfocharts.com

 

The average cost of mining bitcoin varies greatly around the world, with the largest factor determining potential for profit being the local cost of electricity. In some countries with government-subsidized electricity, such as Venezuela, bitcoin can be mined for less than $1,000 a coin, meaning there is significant profit to be had until the price of BTC falls below $1,000. Countries with low electricity costs and colder climates are deemed to be among the best for bitcoin mining, including Canada, Estonia, and Iceland.

In addition to electrical costs are costs for mining equipment, connection cables, fans, computer servers, storage space, as well as personnel and maintenance costs. If all these factors are not properly taken into consideration, it becomes easy for a mining operation/pool to quickly incur massive debt and go belly up, despite promising circumstances or its location. The theft of bitcoin mining hardware continues to pose a problem on an international scale as criminals hoping to hide behind bitcoin’s partly-anonymous nature are stealing computers and mining equipment to help offset operation expenses.

Further complicating matters is the bitcoin reward halving, which is set to take place sometime in May of this year. This will reduce the miner payout for each block found from 12.5 BTC to 6.25 BTC. Unfortunately, the price of bitcoin has halved in the last month instead of doubled, which would mean that if the price does not increase from where it is today by May, most bitcoin mining operations would likely be running at an irrecoverable loss and have to close up shop for good.

Though a reduction in hash power means less equipment (and therefore less electricity) is needed to mine a block of bitcoin, it could be months before a suitable difficulty level is reached that would allow for mining to once again become a profitable enterprise for many miners. This could lead to a sustained lag in processing of transactions caused by the slower finding of new blocks, also resulting in higher transaction fees, but all of these problems could possibly be avoided if bitcoin starts to recover from the recent panic that has plagued it, alongside traditional asset markets.