On-chain data suggests that a miner capitulation event has occurred, which typically precedes market bottoms. There is also a decline in the Ethereum hash rate, meaning that miners have to sell their balances to pay for running their business. Currently, BTC is trading at $20,995.61, 3% higher than yesterday while ETH trades at $1,205.39, 10% higher over the same period.
Revenues Plunge and Difficulty Still High
Miner revenue has dropped to $0.09 from around $0.40 in October 2020. This value is the lowest level since October 2020. Hashrate has also collapsed, with the annual decline of 60% being the fastest since the pandemic selloff in March 2020. Not only is the revenue for miners declining, but the difficulty of mining has also increased, which has increased the cost of doing business for miners.
Due to the dropping revenue and high mining difficulty levels, miners are now in the “extremely underpaid” territory. This chart shows the 30-day change in the revenue and the difficulty of miners.
Miners Forced to Sell
Due to the declining profitability of miners, they have started turning into bitcoin sellers. This month, the number of bitcoins sent from them to exchanges reached 23K, the highest monthly total since May 2021.
In one day, some miners of Poolin sent over 5K bitcoin to Binance, which is around $110 million. This transaction might indicate that some of them can’t meet their break-even point due to their revenue.
The sudden spike in the flow of miners-to-exchange transactions was a sign of a potential capitulation event, which typically precedes a market bottom. This event happened when prices plunged.
ETH Hashrate Falls 10%
The number of people mining Ethereum decreased significantly in April due to the decline in the computational notation known as the hashrate.
The value of mining proceeds has dropped significantly due to the continuous decline in the price of ETH. It has led to a reduction in the processing power of miners. On a year-to-date basis, the activity of miners has dropped to around 900 TH/s.
In the last three months, the price of Ethereum has dropped by over 75%. This move is due to the global economic slowdown. There have also been massive outflows from investment vehicles based on cryptocurrency.
Another factor that has negatively affected the mining industry is the surge in energy costs. According to Ycharts, the energy price index, which measures energy cost, rose to a five-year high in May. This increase in the index is attributed to the geopolitical situation in Ukraine and Russia.
Pending Difficulty Bomb
The pending difficulty bomb is one factor contributing to the Ethereum network’s deteriorating condition. It eliminates the incentive for miners to mint new coins. However, this phase has been delayed by 700,000 blocks, which will prevent the network from improving until September 2022.
The difficulty bomb is a step that will be required to implement the highly anticipated Ethereum upgrade known as the merge. This process will switch the network from its Proof-of-Work to Proof-of-Stake. The goal of the upgrade is to make the network more energy-efficient and faster.
The support from the proponents of the Ethereum transition is gaining ground. According to Nansen, the number of ETH2 deposits has increased significantly. There were around 12 million tokens in the contract, and 75,400 depositors participated.
Despite the recent developments, it is still not all bad for Ethereum. The shift from POW to POS consensus could reduce the network’s computational burden and allow it to operate more efficiently. It is because the former would no longer require the network to perform extensive computational work to secure its assets. The mechanism would also randomly add blocks to the blockchain if a certain number of people have deposited 32 ETH.