May 3
Bitcoin mining and markets
Can Bitcoin miners crash the market?
Here’s what would happen if miners sold their bitcoin holdings
With the rise of institutional investment and corporate mining, miners’ role on the Bitcoin network is becoming more important than ever. But is it enough to influence price action?
Bitcoin fundamentals: A brief introduction
Before we jump into the central topic of this article, let’s refresh some of the Bitcoin basics.
Bitcoin has a fixed supply of 21 million coins. That’s all the BTC there will ever be. And as you may know, mining is the way through which new coins are issued.
All the block rewards that miners receive for providing security to the network are composed of:
- The sum of all the fees of the transactions included in the block.
- A block subsidy, which is a fixed amount of bitcoin released after every new block is found. These are the new coins entering circulation for the first time.
To control inflation, the Bitcoin network cuts block subsidies by half every 210,000 blocks. These events are called halvings, and they significantly reduce the rate of bitcoin emission, which is why they tend to have a positive impact on price.
This means that miners are the first ones to receive the newly issued coins, which gives them a particular influence over the available bitcoin supply.
An overview of the current mining landscape
Over the last few years, technological advancement has provided us with remarkably effective mining hardware that can produce over a hundred terahashes — that’s more than a trillion calculations every second.
The hashrate output of these machines has taken the Bitcoin mining difficulty to astronomical levels and made mining increasingly competitive. It is now almost impossible for solo miners to make a significant profit, let alone compete with mining organizations.
In that scenario, enterprise-level mining entities have surged, investing millions of dollars in mining equipment and leading to a concentration of hashrate.
For example, the 29 companies that form the Bitcoin Mining Council represent around one-third of the total Bitcoin hashrate, according to the organization itself.
Bitcoin miners holdings: do they matter?
Let’s recap all we’ve talked about so far. We know that miners receive all the new bitcoin issued after each block. We’ve also seen how enterprise-grade mining organizations are currently dominating the landscape.
Consequently, these large-scale mining operations own the majority of the newly issued coins and amass an enormous sum of bitcoin. According to Coin Metrics, 0-hop miner addresses hold a total of 1.79 million BTC — around 8.5% of bitcoin’s total supply and 9.5% of the circulating coins.
0-hop addresses refer to miner wallets that receive the block rewards from mining directly. These are usually mining pool operators’ and treasury wallets, from where they then send payouts to their hashrate providers.
As you can see in the chart above, miners’ balance in BTC has grown consistently since the start of 2021, declining only in the last month.
However, the picture seems different when looking at 1-hop addresses. The balance of these wallets has been declining since July 2021, now sitting at 2.56M in total.
1-hop addresses are wallets that are 1 transaction away of pool treasuries addresses. They often belong to the individual miners — whether big or small — that provide their hashrate to mining pools. In other words, they are the actual miners addresses.
Why would this happen? The decline in 1-hop miners holdings makes sense when pairing it with the mining profitability chart. Remember, 1-hop addresses belong to the actual, physical people running the ASICs. They pay the electricity bills, operative costs, maintenance and repairs, etc.
With mining profitability dropping, it’s only logical that these miners have to sell more BTC to cover the costs of mining, expand their operation, and even pay taxes. As you can see, profitability has declined since Q3 2021, precisely when miners started selling their inventory.
The implications of miner accumulation
As we’ve said, miners hold an estimate of 4.35M bitcoin between 0 and 1-hop addresses. Is that amount enough to affect the bitcoin market?
In theory, yes. Should most miners decide to sell their coins, the massive selling pressure generated would drive bitcoin’s price down.
However, there are a couple of reasons why that is extremely unlikely to happen.
The first one is a matter of common sense. Bitcoin miners earn in bitcoin, of course, but pay for their operational costs in fiat currency. In other words, the higher the bitcoin price is, the more revenue they make in dollars compared to their expenditures.
Thus, selling their BTC holdings and driving the price down would be against their best interests. It would certainly make them a considerable short-term profit, but their long-term profitability would take a severe hit.
Secondly, there’s an ideological factor. If someone is willing to spend the time, effort, and money required to mine bitcoin, it is because they believe in it. Bitcoin has a loyal community, and miners believe in its future. That said, it’s logical that they prefer to save their earnings in an appreciating currency like bitcoin instead of exchanging it for inflationary fiat.
It’s not surprising, then, that miners sell only the minimum bitcoin necessary to cover the costs of their operation — as we’ve seen above — and hold their remaining balance in their wallets.
Final thoughts
Although hypothetically miners have enough bitcoin to impact the market, it’s doubtful that it will ever happen. In fact, it’s quite the opposite.
The negative impact it would have on bitcoin’s price would be the perfect metaphor for miners “shooting themselves in the foot.”
Indeed, it’s in miners’ best interest that bitcoin appreciates, as it would mean increased profitability in fiat currency.
More expensive bitcoin not only means miners earn better profits — measured in dollars. It also means they can hold more bitcoin, as the higher the price, the less they have to sell to cover the costs.
As a result, many analysts believe that miner accumulation is good news, as it points to positive miner sentiment in the long run. So, in conclusion, growing miner balances is not something to worry about.
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