In-depth study of BTC's historical structure from the perspective of miner supply and demand

Author: Crypto_Painter Source: X, @CryptoPainter_X

I have seen a lot of comments about "the shutdown price is the bottom" these days, and then I sent a tweet to discuss this matter with everyone, which received a lot of discussion, so I decided to study the BTC miner economics!

Warning: The content involved in this article is a bit obscure and difficult to understand. It is recommended to collect and read it slowly. I will try my best to simplify complex issues;

If you are familiar with the underlying mathematical principles of mining, it is recommended to start from the second part;

1.Before discussing miners, it is best to know the underlying logic of BTC mining;

Each block is actually a long string of characters, which includes the string header, bill information, timestamp and random number;

These blocks are generated at an average rate of one every 10 minutes, forming a blockchain;

C. Miners;

In order to make the network run stably, Satoshi Nakamoto designed rewards for those who packaged blocks. The rewards are divided into "transfer fee" + "block reward". Miners can get these rewards while maintaining the network;

But there is a problem here, that is, when each block is packaged, only one person can get the reward. When the handling fee is very low, everyone wants the block reward, so who should it be given to?

So there is a competition mechanism of "proof of work";

D. Proof of Work POW;

What exactly is the miner doing when mining? The answer is "guessing numbers";

BTC uses the SHA256 algorithm for encryption. Simply put, all transfer information and block information are converted into a string of 256 bytes of numbers through the SHA256 algorithm, such as 0000000....1101000010;

The first n digits of this string of numbers are 0, and the following digits represent the digitization of block information (both letters and characters can be digitized);

What miners have to do is very simple, that is, to try random numbers continuously and bring them into the SHA256 hash function to make a reverse attempt;

However, the algorithm principle of SHA256 is destined to be a process that can only be found by repeated attempts without any shortcuts (except quantum computing);

So most mining machines are trial and error most of the time. Since the random number in each block is unknown, the mining machine needs to verify one by one. In this process, the greater the computing power held by the miner and the more mining machines there are, the more likely it is to try out the correct answer and obtain the right to package the block;

Therefore, the proof of work POW does not essentially mean that all the computing power of the mining machine provides these tasks for the block network, but only a very small part is actually used for accounting. Most mining machines and computing power are always doing the work of "involution" and "competition" with other mining machines;

E. Mining Difficulty;

Do you remember the first n digits of the block number string that are 0? Here n is the mining difficulty. The difficulty mechanism designed by Satoshi Nakamoto is to ensure that a block is produced every 10 minutes. When the computing power of the entire network increases, the value of n will increase;

Because it is also guessing numbers, the fewer the first 0s, the easier it is to guess, and the more 0s, the harder it is to guess the random number that meets the conditions, so the time interval between blocks will increase;

By continuously self-adjusting the value of n through the network, the BTC block network can achieve the result of overall stability in the frequency of blocks;

Furthermore, when the computing power of the entire network is increased to a very high level, the difficulty of mining will also increase accordingly. If your mine previously occupied 33% of the computing power of the entire network, then the probability of you obtaining the right to produce blocks every 10 minutes is 33%;

Based on this logic, you will find that in the entire BTC mining industry, almost everyone and all mining machines are ultimately competing for the reward that appears every 10 minutes;

This is how the computing power war began;

F. Halving

Everyone must know this, because a block is produced every 10 minutes, and Satoshi Nakamoto designed that the block reward will be halved after every 210,000 blocks, then on average, the reward will be halved every 4 years;

However, in this process, since the difficulty adjustment is not real-time, there will always be a slight gap in the interval between blocks, especially when the computing power grows for a long time, the next halving time will be slightly advanced;

Of course, for miners who do not update their mining machines and do not increase their computing power, their income will definitely be halved...

After talking about the previous situation, we can now talk about the supply and demand logic under miner economics.

2. The underlying supply and demand logic of miners;

The first thing that can be made clear is: what is the core demand of miners in mining?

I think there is only one answer to this question: to make money!

In the ancient times of BTC, I believe there must be people who run mining machines for "the stability of the BTC network", but today, I can be sure that all people or companies that are running mining machines have only one ultimate goal of "making money" or "earning coins".

If you agree with this, you can continue reading;

Based on the default prerequisite of this market, we can know that all miners are the party that creates supply for this market. In other words, they are the producers of BTC and the maintainers of the network;

Without considering the trading behavior of early whales or retail institutions, purely from the perspective of network supply and demand, only miners are sellers in this market, and all the rest are buyers;

Therefore, the roles of both supply and demand can be determined. As long as you are not a miner, then for the BTC market, you are the demand side, and as long as you are a miner, then you are the supply side;

Again, there is no discussion of buying and selling under market trading behavior here. I am simply analyzing the conclusions from the perspective of miners' supply and demand;

Phase 1: BTC's ancient period (2010-2014);

The main feature of this stage is that there is no convenient trading platform, and the mining population is mainly concentrated in "geeks", "early builders" and extremely rare "visionaries".

There is no doubt that in the era when mining only required antique laptops, a reward of 50 BTC every 10 minutes could make you a so-called whale in a very short time:

However, the people who held these BTC were not speculators, but early participants with some idealistic ideas, so their selling behavior was rare (except for the one who bought pizza), and their buying behavior was also relatively rare;

This led to extremely poor liquidity in the secondary market of BTC. If someone was willing to buy, the price would soar, and if someone was willing to sell, it would plummet;

As shown in the figure:

At this time, the only sellers in the entire BTC market were miners, and the buyers were long-term holders who made venture investments because they were optimistic about the future of this technology and the network. At that time, the price of BTC was below $100 for a long time;

This stage lasted until 2014, when the BTC price broke through $1,000 for the first time, which attracted a lot of media and public attention. At the same time, Mentougou was closed down due to a hacker incident;

It can be seen that in these four years, due to the overall supply and demand relationship in the market, there was an extremely exaggerated bull market, and BTC rose from $0.01 to $1,000, bringing a 10,000-fold increase;

Phase 2: BTC enters the private sector (2014-2018);

Most of the old people in the currency circle that we know of are exposed to BTC at this stage, and BTC mining has truly transformed from a niche industry into an industry during this cycle;

After the collapse of Mentougou, secondary exchanges began to gradually appear, which brought great improvements to the market liquidity of BTC, but there are still very few people who invest based on the halving cycle theory. During this stage, it is a time period for speculative funds to enter the market in large quantities;

For example, the crazy bull market in 2017 was largely due to the popularity of BTC in South Korea and the tension in North Korea-South Korea relations during that period, but this also laid the foundation for South Korea to become a major currency speculator;

From the perspective of the increase ratio, although the phase 2 has shrunk severely compared with the phase 1, from the perspective of the price base, the significance of this round of market is very huge! It lays a good foundation for the entry of institutions in the subsequent stages;

Phase 3: BTC enters the institutional market (2018-2022);

The selling pressure from miners in the market is not much different from before. Both small miners and large mining companies have irresistible reasons for "selling coins", that is, the replacement of mining machines. The only difference is that since the emergence of large mining companies, the competitiveness of small mining companies has gradually declined due to the financing channel of listing.

Because large mining companies can obtain a lot of financing from the secondary market and the stock market, these funds can ensure that these mining companies have enough funds to complete the update of mining machines even if they do not sell BTC. Therefore, compared with small mining companies that lack liquidity at every turn, more and more computing power is monopolized by these giants, and the living conditions are gradually deteriorating;

But from a macro perspective, whether large or small companies, the final profit channel still comes from the price increase of BTC. In other words, although large mining companies do not need to sell coins in the bear market to recover funds, they still need to ship at some suitable prices in the end. After all, as a company, it still needs to have income in the end.

As shown in the figure:

In stage 3, before and after the BTC market price fell sharply, there were always large amounts of miners flowing into the exchange;

Stage 4: After BTC compliance (2022 to present);

I will not analyze and summarize the market in the past two years. After the BTC spot ETF is passed in 2023, the operating logic of the overall secondary market is already highly similar to that of the US stock market, but the influence of miners still exists. The picture above clearly illustrates the problem;

If we follow the rule of reaching a peak every four years, BTC should really reach its peak in 2025-2026.

However, for now, the hash rate that continues to break new highs and the relative increase in price seem to be a situation of more monks and less porridge.

At this stage, the main suppliers of the market are no longer just miners. Due to the accumulation of time and low-level chips, early buyers and holders of low-level chips will also become potential suppliers. Most of the BTC have entered the circulation state, and the proportion of unmined BTC is already very small;

Although the supply side has added new forces, the demand side is the same. The passage of ETFs has brought strong buying, but these demands are completely different from the believers of hoarding coins in the early stage. Both the supply and demand sides of the current market have a common goal, which is to make money;

From this perspective, we can guess that BTC seems to have officially ended the "early stage" of most asset or industrial development, and the era of wild growth may end with the addition of ETFs, that is, the final demand side;

In the next 10 years, BTC is more likely to become a new type of asset that has both the attributes of US stocks and gold, that is, it is affected by the global financial market on one side and the macro-monetary policy on the other;

The early vision of a pure asset network independent of the traditional financial world, where giant whales could pump and dump the market, has disappeared. From this perspective, Satoshi Nakamoto's ideal has indeed been shattered.

The above is my review of the historical structure of BTC in the past 14 years from the perspective of supply and demand, combined with the development of the miner group. With these understandings, we can discuss the final question of this article;

"

Third, does the miner's shutdown price have any impact on the market?

The answer is: no impact.

If you have read the above long article in its entirety, you will come to the same conclusion as me, that the miner's shutdown price has no substantial impact on the market price, but rather the market price will slowly affect the miner's shutdown price;

Let's give an example:

With the increase in difficulty, large mining companies with faster computing power growth are almost unaffected, but small mining companies with slower computing power growth will face the pressure of reduced income, because the computing power of the entire network as the denominator has increased, and the growth rate of the own computing power as the numerator cannot keep up with the growth rate of the denominator, which will lead to a decline in income.

The decline in income is not terrible, but what is terrible is that at the same time, the price of the currency has fallen to $70,000. Under the influence of the dual factors of reduced block rewards and falling currency prices, the income of small mining companies will drop precipitously;

So they can only sell coins.

Large mining companies do not need it. First of all, their own computing power grows the fastest. Secondly, most of them are listed companies with good financing channels to support them. Therefore, their income will only be affected by the decline in coin prices.

As for small mining companies, their selling may lead to a further decline in coin prices. Of course, the impact at this level may be small. Let's assume that there are macro reasons that cause the coin price to fall further.

Then the price fell to $48,000, and a large number of small miners were forced to shut down at the average shutdown price, so they had to shut down. Since the shutdown caused a large amount of computing power to disappear, the BTC network would automatically reduce the difficulty, that is, reduce the size of the n value;

When the difficulty decreases, the probability of obtaining block rewards under the same computing power will increase. From a statistical point of view, the income will increase, so the shutdown price will move down;

Assuming that the price falls further, the same logic will take effect. More old mining machines will be forced to shut down, the difficulty will further decrease, and the shutdown price will also drop further. However, due to the nature of profit-seeking, the shutdown price will always follow the market price after being broken, and it will be slightly higher;

We will find that in this special process, it is not the shutdown price that affects the market price, but the market price that affects the shutdown price;

Let's talk about another question: after the price falls below the average shutdown price of miners, will miners choose to buy coins directly instead of mining?

This logic has two sides. For small mining companies, the ultimate goal of earning coins from mining is to sell coins to make money, so when the price falls below the shutdown price, choosing to buy coins is an illogical behavior;

But if you are an institution or a wealthy person with a lot of cash, and want to allocate BTC for a long time, but don't want to buy BTC at a high price, then building a mining plant by yourself can ensure that this investment can bring stable BTC returns in the long run. When the shutdown price is broken, buying coins directly becomes a more cost-effective choice, so there will be a certain market demand at this time;

That is to say, mining is essentially a forward arbitrage strategy;

Fourth, the last question: What is the shutdown price?

If you have discussed the previous content with me, you will find that the shutdown price itself is a difficult value to determine. From the perspective of the mine owner, the shutdown price of a mining machine is affected by various factors;

1. Electricity price;

2. Maintenance cost;

3. Engineer personnel cost:

4. BTC network difficulty;

5. Depreciation of mining equipment;

Instead of paying attention to the market shutdown price, it is better to pay attention to whether the total network computing power of BTC has dropped significantly;

This picture clearly marks the time when the total network computing power has dropped significantly in the past two cycles. Except for halving and the Chinese government's withdrawal, you will find that in most cases, the currency price falls first (market reasons), and then the computing power begins to decline;

This also confirms the above logic. Only when the computing power decreases, the difficulty will decrease, which will lead to a decrease in the average shutdown price.

Since everyone's shutdown price is different, it is naturally unreasonable to judge the bottom based on the shutdown price.