Bitcoin plunge has been prefigured by miners’ inventory data – CoinDesk – Coindesk

The recent drop in Bitcoin (BTC) prices has caught many investors off guard. However, a key measure showing the concern of miners on the network gave a warning several weeks ago.

The miner’s rolling inventory (MRI) figure, created by the crypto market data company ByteTree to measure changes in the inventory levels held by these main market players, remained below 100% in January, suggesting a lack of confidence in the 30% price rally this month. .

An MRI greater than 100 means miners sell more than they exploit and reduce inventory, while an MRI less than 100 indicates hoarding – miners sell less than they extract and hoard inventory.

Conventional wisdom says that a seller always sells high. Thus, some investors can take an MRI reading of less than 100, because miners anticipate a rise in prices and are therefore hoarding in order to liquidate at a high price at a later date.

However, miners operate in cash, notes the fund manager of Atlantic House and the founder of ByteTree, Charlie Morris, and are still sellers in the market by liquidating the rewards (bitcoins) received for the mining blocks in order to cover their operating costs.

An MRI level below 100 is not necessarily a bullish price indicator, but represents a fear among miners that the market is too soft to sell. On the other hand, an MRI greater than 100 reflects a solid market capable of absorbing the selling pressure of minors.

January’s 79% MRI, the lowest in more than two years, was essentially a warning sign that a bull trap was in the works. Bitcoin reached almost $ 10,500 in mid-February and has been falling since.

At the time of publication, the largest cryptocurrency by market capitalization is trading at a two-month low below $ 7,800 and is only $ 640 becoming negative on a cumulative basis.

The miners generated 53,955 bitcoins and sent 42,451 bitcoins to exchanges in January, which gives an MRI of 79%, according to data from the blockchain monitoring company Chainalysis.

Historically, yields have been poor when miners sell less than they exploit, while yields have been strong when miners have sold more than they mined, according to Morris.

In other words, miners tend to build stocks during bear markets and decrease stocks during bull markets.

While it may seem counterintuitive to read hoarding as a bearish signal, an analogy with the traditional financial system is instructive.

The central banks of countries with account deficits depend on massive inflows of money to build up foreign exchange reserves (usually in US dollars). For example, the Reserve Bank of India will buy dollars in the spot market when the Indian rupee has an uptrend and can absorb the RBI supply in US dollars.

Buying dollars during a rupee downtrend would be risky as it would only add to downward pressures around the local currency.

Likewise, miners accumulate or avoid selling when they feel that the market lacks the strength to absorb their offers. Selling in a weak market would drive prices down further and, in turn, hurt profitability.

More than any other riding on the market, miners have the greatest influence on prices. Mining pools represent the highest percentage of total bitcoin circulating in exchanges, for example.

In January, more than a quarter of all BTC received by the exchanges came from mining pools. Meanwhile, hosted wallets and merchant services – payment gateways or processors – accounted for just over 10% of BTC’s total supply on the exchanges.

Minors must therefore be extremely careful when unloading their assets, as their actions can result in massive sales.

This was the case when weak miners, faced with losses from the drop in bitcoin from $ 14,000 to $ 8,000 in the third quarter of 2019, began to drain their assets in the fourth quarter, while noted by Adaptive Capital analyst Willy Woo. This precipitated a larger drop to $ 6,500 in mid-December.

According to data from the Poolin mining pool, widely used mining computers such as AntMiner S9 and Avalon 851 are already struggling to generate daily profits. If prices continue to fall, inefficient small-scale miners may close down and sell their assets to mitigate losses.

However, some miners are still optimistic about the future prices of bitcoin and remain unfazed as they contemplate the halving event planned for May.

“In the medium and long term, we have a very positive opinion on the price,” said Xiao Yang, CEO of the Chinese mining and cryptocurrency mining company PandaMiner in an interview. “Despite the short-term volatility, we expect to see market demand at a relatively high level as it becomes more difficult to mine bitcoins on the supply side.”

As bitcoin prices fall sharply, some miners would consider turning to lending platforms to secure their bitcoin in exchange for money. This would help maintain their cash flow, which has been strained by the recent low market prices, according to Yang. This decision aims to help miners not be forced to sell their bitcoins at low prices when they run out of money.

Besides the lower prices, the rapidly growing hash rate has made it even more difficult for miners to keep their bitcoins; they have to borrow more from lending agencies, said Yang.

According to btc.com, the growth rate of the difficulty in exploiting bitcoin is now at 6.88%, against 0.38% on February 25.

Yang said another phenomenon showing that the mining industry is generally confident about the future prices of bitcoin are the new mining computers marketed by Bitmain and Canaan Creative. Bitmain unveiled its latest product, the S19, on March 10, while Whatsminer will launch its new product in April.

Miners consider the drop in bitcoin prices, correlated to the liquidation of the American stock market, as a temporary change in the market, according to Yang.

“We are still focused on increasing prices in the long term and are not overly concerned with short-term market movements,” said Yang.