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How To React To The Forecasts Of Experts Who Scare Themselves

October 19, 2022
min. read

Minto never does forecasts. However, forecasts are all around us, because they provide a very fertile ground for fantasies, fears and hopes. There are so many forecasts that, as a rule, they are forgotten very quickly - which is unfortunate. It is extremely interesting and useful to evaluate the most outlandish predictions over time. Today we are bringing to your attention one of these predictions, which describes the Bitcoin price behavior until mid-2023. We will not mention the expert and the resource that published this forecast, because we are interested in an abstract analysis, rather than a discussion.

So, this expert links the fall of the Bitcoin exchange rate below $2000 with the general market sentiment and the strong correlation of BTC with the S&P500 index, whose prospects are very deplorable in view of the Fed's monetary policy tightening, which, of course, is fair: the influx of institutional investors into the cryptocurrency market has done its job and turned Bitcoin into a classic risky asset, subject to all the classic trends.

We will consider this forecast a kind of a stress test for the market in general, and the Minto project in particular. What happens if everything happens this way?

Let's analyze, and then come back to this in May 2023 and see whether reality corresponds to the prediction.

So, the current combination of the Bitcoin exchange rate and its network difficulty is unprecedented (the chart is below). The difficulty reached 35.61T, while the rate fell below $20,000.

according to Hashrateindex

This means that many Bitcoin mining farms, in particular those that use electricity priced over $0.15/kW, are already being forced to turn off miners, since their profitability has gone into negative territory. Even the most energy-efficient hardware, like the Antminer S19 XP with an efficiency of 21.50 kW/TH has already touched the zero-profitability mark with the current electricity prices, let alone older miner models, which, in the current state of affairs, have long gone into the red and should be cooling down in reserve.

At the same time, advanced projects, in particular Minto, run on electricity priced under 0.06 $/kW, therefore they have a greater safety margin:

according to Hashrateindex

We should also note that the lower the Bitcoin exchange rate drops, the more miners will work at a loss, which means that these miners will be disconnected. Consequently, network difficulty will steadily fall.

The almost twofold drop in the Bitcoin exchange rate from $6,600 to $3,400 during the difficult winter of 2018-19 caused a 1.5-fold drop in difficulty from 7.45T to 5.11T. We can assume that this ratio may well work in our time, so a drop in Bitcoin to $10,000 will cause a corresponding drop in difficulty to 22T, which provided a daily income of about $53 at a Bitcoin rate of about $63,000 in November 2021. Therefore, at the rate of $10,000 - 6.3 times less - it will provide $8.4 per day ($4.33 excluding electricity). So, this is still above zero, and only 1.5 times less than the current profit.

In other words, since mining income is proportional to the Bitcoin exchange rate and inversely proportional to difficulty, a two-fold drop in the Bitcoin rate and a corresponding one-and-a-half drop in difficulty will lead to a 1.3-fold decrease in mining income, that is, a 23% drop.

Using this approximate formula, we can evaluate what will happen with a subsequent twofold drop of the BTC rate. At $5000 per Bitcoin, the mining income will be $6.5 ($2.43 net profit), and at $2500/BTC - $5.0 (~$0.9 net profit).

In fact, with such a critical drop, the difficulty will drop even more, because miners will start to be turned off everywhere since the share of inefficient (by today's standards) hardware in the world is more than 60%. It’s highly likely that even if the Bitcoin exchange rate drops to the $2000 mark, the net profit of an effective miner will not fall below $1 per day, which, of course, is not seriously profitable, but will preserve the viability of advanced projects like Minto.

So, even in the case described in the above chart by an unmentioned expert, there is no doubt that strong market players, including Minto, will remain in the game. So now all more favorable circumstances can be considered positive, and we can wait happily for mid-2023, so as not to forget to say thank you to all the Armageddon experts.

Of course, the considerations described above are very schematic and can hardly be considered analytics, just as the “expert forecasts”, the most prominent of which was a starting point for this article. Nevertheless, the stated approach is justified and is confirmed in many other theories regarding Bitcoin pricing, and the checks and balances of its price.

Here we can highlight the Hash Ribbon indicator, developed by the founder of the Capriole Investments investment company Charles Edwards in 2019, where the Bitcoin price bottom is reliably linked to the so-called “surrender of miners”, hashrate and the Bitcoin network difficulty.

(The yellow vertical stripe is the miners' surrender zone)

At the same time, it is not necessary to consider Hash Ribbon, like other indicators, something special - it is just a type of chart that allegedly signals to buy at its creator's will. One shouldn't perceive such indicators and services as an indication to action, it is enough to understand how they work and what underlies the results they visualize.

Fundamentally, Bitcoin price always depends on mining profitability to varying degrees. Another thing is that situationally, whales, institutional and private Bitcoin holders can break the trend in both directions on the wave of excessive fear or optimism. However, this is always followed by exchange rate stabilization around some equilibrium value, mostly due to the balance of price, hashrate and network difficulty, that is, objective mining realities.

The paradox of the situation lies in the fact that as technological progress develops, mining hardware becomes increasingly more energy efficient, which ensures non-zero profitability in conditions never seen before. This, in turn, may indirectly contribute to an even greater drop in the Bitcoin price, as the zero profitability threshold decreases.

However, despite all these considerations and paradoxes, the following rule remains key for Bitcoin: whatever the market conditions, the Bitcoin exchange rate cannot fall below the value at which at least one miner is profitable. This simple rule is embedded in the system itself, so

In the end, whoever provides the most efficient mining infrastructure, and not a mindless and unrestrained increase in hashrate at any cost, will win.

In addition, as we showed in an article comparing American mining companies, diversified businesses demonstrate the best energy efficiency, however, it's also important that mining is the product of diversification, and not vice versa. Therefore, the fundamental advantage of any company is still its energy efficiency and debt-to-equity ratio, D/E.

Join Minto and leave future predictions to experts, while we build energy-efficient infrastructure together with you and make money!

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