A Bitmain aligned crypto-news site claims in what appears to be a translation of other local media that Chinese miners have become the biggest crypto short sellers, margin selling bitcoin or eth as a hedge.
“Everyone is short-seller, we do this for self-defense but that will lead to a further decline in cryptocurrency price…
Without short selling, we will be eliminated ultimately, but if everybody keeps doing this, we will finally die together, which is quite heroic.”
So said a Chinese miner called Jin Xin. So suggesting he is effectively going half long and half short in a strategy that in some ways doesn’t make very much sense.
“If I mine 30 coins in the next month, while its price may continue to fall by another 10% according to the current trend, I shall place a short order on the exchange to sell them at current price but deliver one month later,” he said.
Which sounds like a proper futures rather than margin selling. Instead of facing the uncertainty of what the price might be in a few months, farmers can sort of lock in the current price in futures, and then deliver once the produce, say tomatoes, are ripe and ready for delivery.
Bitcoin kind of has the same ripeness quality as newly mined coins can’t be spent for three months or so. Price obviously might fall in those three months, so what new miners appear to be doing in a very simple description is sort of putting 30 coins as collateral, borrowing 30 coins – which they have newly mined, but can’t use yet – and then betting the price will go down.
If the price does go down, then obviously they make a profit, but that profit is cancelled by the now lower value of the 30 coins the have. If price goes up, then they make a loss in the short selling, but that loss is canceled by the higher value of the now movable 30 coins.
So basically they’re engaging in complex trading with the aim of selling their coins immediately rather than waiting for them to be “ripe” in three months.
The suggestion here is that they’re being very selfish and perhaps slightly stupid. In 2014-15, for example, miners would hold off simple or complex selling and would try to live off reserves to find that magic point when demand crosses supply.
Now they’re indicating that miners care no longer to do so. They’re kind of trying to milk whatever is left.
Bankruptcy is probably what is left for many of them. The wheel will most probably revolve with the smarter ones rising to take the place of the more stupid ones.
The smarter ones being those that have the funds to weather the storm and can live off reserves in the hope that eventually the market will turn and thus their long term view will pay off.
Even if, however, it turns out they’re all dumb, the halving in now about a year should get rid of the more dumber ones as the Nakamoto design might be slightly crude until inflation falls to near zero, but appears to have taken into account that question of what sets the floor or what backs bitcoin.
For almost all of 2018, until recently, bitcoin’s hashrate kept increasing even while price was decreasing. The profitability of some miners was halved and halved, but they were still profitable.
So more and more of them sold instantly, either in the spot market or through sophisticated hedging, bringing price down and down while difficulty was rising up and up.
Obviously that’s not sustainable. Thus a point was reached last month whereby for some of them they can insta sell all they want, but still remain unprofitable and effectively bankrupt.
So they sold off what became bricks for scrap metal, to the benefit of the remaining miners you would think, but here is where it can get interesting.
Hash has decreased by 50% in the past month, so the remaining mining hardware is now 50% more profitable. However, price has fallen by 50% too, so in fact they’re almost as bankrupt as the ones that did become bankrupt.
In this simple analysis, which should and perhaps will be subject of scholarly research, some of the remaining miners will also go under if price continues to go down.
Logically, if we now go to a human level, the ones that are first kicked out are the more stupid ones or the less loyal ones or the ones in the least profitable region.
As the purge continues, you would think the level of intelligence – whether biological or accidental – would rise.
You would thus presumably end up at a point where new supply is no longer sold, but held, come what may.
As the miners’ new supply is gradually taken off the market due to the reduced cost of mining which still keeps mining unprofitable or about there, the question of demand can of course lead one to wondering if the ultimate conclusion is not a price of zero.
That makes it complex because one would have to ask why would one want or demand bitcoin. Plenty will give a list of reasons, so let us take that subjective element out of the equation and focus on the dynamics of the relationship between miners and price.
With mining now unprofitable and some still hanging on, whoever still stands is now making a bet – perhaps not by choice but to salvage his/her business – that the market will turn and the sacrifice will pay off.
It might not, of course, but it probably will for someone eventually unless we are to think that this very new asset class has no value whatever even as some sort of collectible.
If it is of some value to someone, then if mining was profitable he would have bought new mining hardware. With mining now being unprofitable, he or she would just buy the coin.
So now we have not only falling circulating supply, but also rising demand, as far as this somewhat isolated question of mining is concerned in any event.
The halving then cuts that new supply in half, making mining very unprofitable. So if someone wanted bitcoin or eth, then obviously it would make much more sense to buy it.
Just as obviously if no one wants it then the dynamics don’t matter, but presuming there is some demand, then an equilibrium is reached through the somewhat crude, but very effective, “human” level design of difficulty and its relationship to price.
So the more stupid or very selfish miners can short all they want, but many probably have no choice at least at an intellectual level but to see whether this very elegant design does actually do what one would think it would do.