The Week On-chain Newsletter

Miner Incomes Under Stress

With the market trading near the price lows of the 2021-22 cycle, a great majority of investors are now holding unrealized losses. Furthermore, miners appear to experiencing some income stress, with revenues falling, whilst production costs climb.

CryptoVizArt, Glassnode

• 10 min read
Miner Incomes Under Stress

Coming out of a bloody nine consecutive red weeks, the market closed its first weekly candle in the green, albeit with a relatively uninspiring weekly gain of 1.57%. The market traded between a weekly high of $31,900 and a low of $29,375.

With prices trading at the lower end of the 2021-22 cycle range, the vast majority of buyers from the last 17-months are now holding unrealized losses. The intensity of this uncertainty and stress in the market is observable in on-chain data, with a continual reliance on Long-Term Holders to shoulder the load.

We are also seeing miner revenues decline substantially, despite the climbing difficulty. This suggests that miner operations have expanded, capital has been spent, and production costs have increased as revenues are falling off. As profit multiples compress across the board and financial stress increases, the highest probability is that the market is within the second and historically final capitulation phase of a Bitcoin bear market.

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Historical Macro Lows

Among all models mapping the value zones in Bitcoin market, two simple but powerful indicators have been utilized widely by analysts alike; the Mayer Multiple and Realized Price.

The Mayer Multiple is an oscillator defined as the ratio between price and the 200-day moving average. Therefore the Mayer Multiple represents the deviation from this long-term average price as a tool to gauge overbought and oversold conditions incorporating data points encompassing Bitcoin’s lifespan.

Following the original analysis, oversold or undervalued conditions have coincided with the Mayer Multiple falling in the range of 0.6-0.8. These multiples are applied to the 200DMA in the following chart to demonstrate the undervalued zones according to Mayer Multiple; 0.6 MM < Price < 0.8 MM.

Throughout the past four bear markets, market prices have entered this value range in two distinguishable phases:

  • Phase A- Early in the bear market, as the initial post-ATH sell-off causes investors to panic
  • Phase B Late-stage bear market as the market enters the bottom formation and capitulation

In the current market, prices have been hovering inside this value zone ($25,200 to $33,700) since 5-May, more closely resembling Phase B of the previous bear cycles. From a probabilistic view, Bitcoin prices have only closed below a Mayer Multiple of 0.8 for 7.9% of trading days.

Live Workbench 

The Realized Price Model is the former macro indicator to map the cycle bottoms. The Realized Price is currently trading at $23,600 and represents the estimated average cost basis of all coins in the Bitcoin supply, based on the price when they last moved on-chain. In previous bear market cycles, when spot prices traded below the Realized Price, it signalled elevated probabilities of a macro low being established.

Historically, the overall market cost basis or realized price has been a very sound cycle support level, with 84.9% of Bitcoin trading days closing above this level. In other words, only 15.1% of trading days have closed below the Realized Price, providing a similar confluence with the Mayer Multiple of 0.8.

Live Workbench

A Prolonged Bear Market & Profitability

Having now assessed past bear market structure to model a potential cycle bottom zone, the confidence of this claim can be queried by quantifying the degree of ‘Bear Market pain’ felt across the network. The Net Unrealized Profit/Loss (NUPL) metric maps out the overall unrealized profit and loss of the network as a proportion of the market cap. Thus NUPL can be used as a compass to assess this market pain threshold.

Since early May, the NUPL has fluctuated in a compressed range of 18.6% to 25.0%, indicating less than 25% of the market cap is held in profit. This resembles a market structure equivalent to pre-capitulation phases in previous bear markets. In the event of a capitulation, the NUPL has usually traded down to an unrealized loss of up to -25% times the Market Cap. Given the current realized price of $23,600, the matching price range of $23,600 to $20,560 is where NUPL would imply a full-scale capitulation scenario.

It is worth noting that NUPL cycle lows have been gradually climbing as a result of both lost and long HODLed coins. This impact may well be further intensified by the introduction of derivatives, which enable the hedging of risk without selling spot exposure.

Live Chart

Since NUPL tracks the unrealized profit and loss in the market, we can supplement with an investigation of the Realized Losses to gauge the actual investor response. Here, the Cumulative Realized Loss (90D) is presented as a ratio with the Realized Cap to normalize for market size. Consistent with the highlighted two-phase bear market pattern in the Mayer Multiple models, the cumulative realized loss chart also is denoting two stages in a bear market.

The early wave of losses of the current cycle has already been realized via the post ATH crash in May-July 2021 (phase A). At the moment, the market is experiencing phase B where the probability of a capitulation event taking place is elevated, and sustained losses are being realized on-chain.

Live Workbench

Long-Term Holders Shoulder Losses

One of the outstanding trends of a bear market is the diminishing share of short-term holders (STHs), as speculators are flushed from the market. As a result, STHs end up holding fewer coins, and Long-Term Holders accumulate and dominate the circulating supply. This trend is the result of two parallel events occurring during a bear market:

  • Phase A: Short-term holders who purchased near the top are immediately plunged into a loss, reducing their overall Supply in Profit.
  • Phase B: Long-Term Holder accumulation persists during the bear, despite prices pushing their newly acquired coins into an unrealized loss.

At the moment, almost 58% of the circulating supply is in profit while in the last three market capitulations this metric fell down to <50% levels. STH-Supply in profit is just 2.2% meaning the short-term holders are almost entirely at a loss. Meanwhile, LTHs have seen their share of profitable supply drop from 68.5% in April to 55.7% today, indicating they are currently shouldering much of the market's unrealized losses.

Live Chart

To add a new dimension to this observation, we can look into the share of Supply in Profit Held By Long-Term Holders. Here, the growing dominance of long-term holders (or diminishing share of short-term holders) through the late stages of a bear market are noticeable.

In the last two extended bear markets, the 14 DMA of this metric broke above the 90% threshold line. This means under the psychological pressure of bearish price action, short-term holders were holding < 10% of the profit in the market. With the recent leg down to sub $30K range, this metric crossed over the 90% threshold. Above this level, STHs have essentially reached a near-peak pain threshold, with almost no unrealized profits held while LTHs dominating the remaining profitable supply.

Live Workbench

Moreover, the examination of the unrealized loss distribution among LTHs and STHs suggests the following findings of the current cycle:

  • Price currently is trading at the lows of the 2021-2022 cycle, which means almost all buyers since Jan-2021 are now holding unrealized losses.
  • The LTH supply in loss has been increasing since May 2021 but has since plateaued at 26% of supply (vs. STHs with 16%). This indicates that LTHs are shouldering more of the unrealized losses (a constructive reshuffling of coin ownership), and currently holds around 62% of the 2021-22 cycle supply in loss (26% / (26%+16%)).
  • STH Supply in loss is also approximately stable, oscillating around 16% to 18% of supply. Note that 155-days ago (1-Jan-2022) the price was $47k. Thus the majority of STHs accumulated throughout the previous consolidation range in Q1 2022.
Live Chart

The behavioural analysis of the LTHs under pressure would not be concluded without examining their reaction to intense price corrections. Here we will inspect the Return Bands of Long-Term Holders’ Realized Profit & Loss metric, specifically for coins deposited into exchanges. In the 2018-19 bear market and the March 2020 Covid crash, the aggregated realized loss exceeded 0.006% of the market cap. This pattern has now reoccurred during the plunge below $30K in early May. To lay a foundation for this investigation, we should emphasize that:

  • The LTH losses on coins deposited to exchanges have now reached a magnitude comparable to previous bear markets. However, we do not yet have the duration component, and also the drawdown magnitude is 58% relative to previous >75% drawdowns.

Miner Earnings Under Stress

After determining the severity of the current bear market and exploring the long-term holders’ corresponding behaviour, we will now assess the reaction of miners to declining incomes.

To lay a foundation for this analysis we first have to quantify the profitability of the market from the miners’ perspective. The Puell Multiple is the ratio of the daily issuance value of bitcoin (in USD) to the 365-day moving average of this value.

Assessing the entire history of Puell Multiple, the two-phase-bear market narrative outlined above is also evident here. At the early stages of the bear market, the Puell Multiple typically falls into the range of 0.6 to 1.0, indicating current incomes are up to 40% lower than the last year on average. Subsequently, in the later stages of a prolonged bear market where the capitulation events tend to take place, the Puell Multiple plunges to the sub-0.5 zone.

This metric is currently sitting at 0.66, on the edge of entering the capitulation range. Taking the high correlation between this indicator and price into account, a price decline of -10% or more would indicate widespread stress on miner income streams.

Live Chart

In reaction to the prevailing decline in USD incomes since November 2021, we can observe miner balances declining and additional spending taking place. The Miner Net Position Change metric is currently indicating an aggregate miner balance reduction of between 5k and 8k BTC per month.

Live Chart

This signals a distinct change in miner behaviour, as their balance had seen a net accumulation of around 12k BTC during the first drawdown from ATH. In response to the market crash due to LUNA Foundation selling over 80k BTC in an attempt to maintain the UST peg, miners have since distributed 10k BTC adding to the selling pressure in the market.

Live Chart

A Chronological Divergence

An intriguing divergence to discuss is the continued climbing of network difficulty, which has risen by 132% since the ATH, despite the financial incentive of total miner revenue dropping by 56.7%. This substantial jump in difficulty suggests that existing miners have expanded their operations, and new miners have joined the network despite a massive income reduction. As such it is likely that recent capital expenses on mining hardware and facilities could add continued pressure to miners’ balance sheets.

Live Workbench

Summary and Conclusion

  • Based on the Mayer Multiple, and the Realized Price, the market has now pushed Bitcoin prices down to levels that have been seen for less than 15% of Bitcoins trading days.
  • Network unrealized losses are hovering in the twilight zone of late-stage bear markets, however, are not yet signalling complete capitulation. With prices at the lower bound of the 2021-22 cycle, all buyers since 1-Jan-2021 are now underwater.
  • Long-Term Holders are currently shouldering the majority (62%) of unrealized losses, signifying that a gradual but constructive change of ownership has taken place throughout this bear market.
  • Miners appear to be increasingly under stress, with signs of both balance sheet reduction alongside recent operation expansion expressed through rising difficulty. This means that each coin is now more expensive to mine, whilst the USD denominated reward continues to decline and may portend a potential miner capitulation cycle ahead.

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