Making sense of the crypto bear market

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It may be the summer season, but crypto winter is here. Much of 2022 has been defined by increased volatility and the most prolonged bear market we have seen in years – especially for bitcoin. The most popular form of crypto has seen its price drop from more than USD $68,000 in November 2021 to under USD $21,000 at the time of writing – roughly a 70% drop in just over seven months.

The extended decline has been punctuated by some sensationalized panic within crypto circles after events like the implosion of the TerraUSD stablecoin in May and the asset-freezing announcement from the Celsius Network in early June. The latter cited “extreme market conditions” as the primary reason for pausing users’ ability to withdraw, swap, or transfer assets.

Global inflation (and especially in the U.S.) has also been in the spotlight and is something the Federal Reserve is aiming to corral in part by raising interest rates. The Federal Reserve increased rates by 0.75% in June, marking the single largest increase since 1994. With more raises likely on the horizon, it is a difficult time to borrow money, meaning there are fewer investors willing to bet on assets like crypto that have a greater perceived risk. While asset prices not only increase because people borrow money to invest in them, the lack of increased investment in bitcoin has certainly been a factor in its challenge to recover previous market highs.

With all the panic, speculation, and downturn taking place in the market, it is essential for miners to understand the best course of action and how the network may respond in the coming months. Here is a look at how miners can adjust and what we may be able to expect from the market as a whole.

How miners respond to the bear market

First, it is important to recognize that this is not anything new for cryptocurrency. After reaching a previous high of around $20,000 in December 2017, the price of bitcoin spent much of the next year in decline, eventually bottoming out at around $3,000 in December 2018.

Due to such events in the past, we have some insight into how miners perform and which can emerge at the end of the tunnel. Typically, if a miner is strong enough to make it through the bear market, they can come out of it in a better place once bitcoin’s price and those of other assets begin to rise again. Weak miners, on the other hand, are usually forced to shut down, sell, or give up their machines. Leverage in the crypto markets also often contributes to the demise of weaker miners.

There has also been speculation of a point where bitcoin mining would shut down altogether. Unless BTC suddenly becomes a non-viable asset, this seems highly unlikely. Both the game theory and economics of the coin were designed such that as long as bitcoin is still a viable asset, people will make money (or find a way to make money) on it. There is a massive level of belief in bitcoin as an alternative to traditional finance, and this widely held vision of a new way to transact and of how assets are tracked, moved, and managed bodes well for the continued long-term success of the currency.

Another key consideration is how the market typically responds to extended periods of downturn. Because mining difficulty is tied to the total amount of hashrate on the network (and less directly, profitability), it also adjusts in times like these in one of two ways.

  • Difficulty will decrease if certain older machines like the Bitmain Antminer S9 do not come back online, opening the door for stronger miners still online to earn more bitcoin for the same hashrate.
  • Difficulty will stay the same if those older devices come back online in the hands of the stronger miners that overtook the weaker miners. Those stronger miners will then have more hashrate to use at the current difficulty, also resulting in more BTC mined.

In the face of challenges like these, the miners and operators that are able to maximize efficiency and sustainability at scale will ultimately persevere and come out ahead once prices begin to head north once again.

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