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Watch the Miners: Broker’s Beat Issue #2

Welcome to the second issue of our recently unveiled newsletter, ‘The Broker’s Beat’. If you missed last week’s edition make sure you get caught up by reading it here.

This week we go deep into mining dynamics and what we think will happen as several different stakeholders’ goals come into conflict. We are excited to take this journey with you and we hope you enjoy this edition of The Brokers Beat.

PayPal Picks Paxos to Supply Crypto for New Service, Sources Say

Source: CoinDesk

“It’s a plum assignment for New York-based Paxos, which last week launched Paxos Crypto Brokerage and announced its first customer in Revolut US, the American division of the U.K.-based fintech firm that offers bitcoin trading. A formal announcement of the PayPal relationship could come as soon as this week, one source said.

The offering would make PayPal one of the most prominent mainstream companies to offer cryptocurrency purchases, joining fellow publicly-traded payments provider Square and unicorn stock brokerage Robinhood.”

 Coinsquare’s executives resign following wash trading scandal

Source: Invezz

“According to the OSC, the exchange engaged in this fraudulent activity from July 2018 to December 2019, where 90% of its volume was fake. The settlement terms saw Coinsquare admit to conducting approximately 840,000 illicit trades on its platform. These trades amounted to 590,000 bitcoin (BTC) worth about £4.33 billion at the time of writing.”

Miner Hoards: Q2 Bitcoin Mining Supply Outflow Touches 12-Month Low

Source: Bitcoin.com

“Miner selling continues to remain at historical lows even though the reward halving took away half the revenue from operations. At the same time, the BTC hashrate is seeing all-time highs as well as the network is hovering around 125 exahash per second (EH/s).”

Key Metrics Show Institutional Demand for Bitcoin Is Surging Rapidly

Source: CoinTelegraph

“If the demand for Bitcoin climbed steadily in the first three months of 2020, it surged rapidly from March to June. One possible explanation for the sudden increase in attraction toward Bitcoin is its crash in early March when Bitcoin’s price briefly dropped below $3,600 on BitMEX. More than $1 billion worth of futures contracts were liquidated, but in the 72 hours that followed, the volumes in retail markets surged substantially, especially on platforms like Coinbase.

Last week we discussed fatigue within the markets and the slowing purchases of Bitcoin. Since then, the Twitter hack has occurred and upended the fundamental perception of Bitcoin. 

It isn’t clear if Barack Obama, Elon Musk, and Kim Kardashian having their accounts be used for a Bitcon scam will have a long-term effect, but there was definitely a short-term drop. 

We saw Bitcoin drop by by a bit last week, but now it is up 2.6% since the news broke. That tells us that the market doesn’t really “blame” Bitcoin as much. 

Going more into technicals, the below 5-day chart shows that the RSI (Relative Strength Index) has stayed pretty tame, with a slight deviation into “strength” yesterday. This is reflected in the jumps in price that occurred and brought Bitcoin to the ~$9,500 price level. As we’ve said before, we are generally long-term bullish on Bitcoin, but everything we’re seeing indicates a neutral trend with no breakouts in sight. 

As we’ll discuss below and have referenced before in a report by CryptoCompare, Bitcoin trading volumes are dropping and this is what’s holding this neutral trend in place. The hodlers are part of it, but mining dynamics are also coming into play here.

As you know, mining dominance is a measure of the health of the network by looking at the distribution of hash rate between miners. In an ideal world, there are more.

The below chart from Blockchain.com shows the distribution of hash rate between major miners. We briefly touched on this last week, but one trend that people are starting to be worried about is that China currently controls approximately 65% of the mining power. Although the risk of a 51% attack is very low, it is a source of concern. Additionally, there’s the trend of unknown miners accounting for approximately 22% of mining power. Some of these miners have been absorbed by the larger outfits, which could be a good thing for network security, but this is a trend we will need to go into further in the future to really understand the implications.

As we mentioned last week, BTC’s hash rate had just hit a new high of 125.99 terahashes per second. Now it has dropped down to a more moderate level as the fees cease to cover the expenses for many miners. 

The below 30-day chart shows this drop, which corresponds with the 15% increase in network difficulty that occurred a little over a week ago. More efficient miners can profitably sell now, and the less efficient ones are holding on (as we’ll go into more detail on below) until they can sell at a profit. This obviously carries more risk. 

Last week, the network difficulty had just spiked to an all-time high of 17.35 trillion. In the 3-year chart below, you can see this in perspective and understand how the economics of mining are changing. The hash rate drop above is occurring as the more inefficient miners are “shaken” out of the market.

Last week, we discussed the statistics around drops in trading volumes for both top tier and lower tier coins. This week, we have a slightly more focused take for you. 

Miners seem to be hoarding their coins now. The 7-day average of Bitcoin miners’ outflow has moved significantly lower, and this quarter represents a 12-month low for miner outflow. 

We briefly mentioned this above, but mining dynamics make it so it is no longer profitable for every miner to run their operations by selling on the spot. The best hope they have is to hold out for a price increase where they can then turn a profit. This is 

As we see the less efficient miners capitulate in the future, this dynamic will reverse and outflow volume will once again increase. 

Zooming out a bit, Bitcoin’s market capitalization dominance has lowered to 62.33% which continues the belief that we’re about to go into an altcoin rally.

That concludes the first issue of the Broker’s Beat. Tomorrow we’re publishing our Insurance Industry Overview Report. Watch out for this high-value report in your inbox. You won’t want to miss it!

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