ABSTRACT

The specific trend we look for during turning points in market cycles is the churn and transfer of an asset between retail and institutional investors. Markets are dictated by human psychology, which is why similar patterns and characteristics are repeated across distinct markets, regardless of the asset. In Bitcoin Mining, we define a “Retail Miner” as a miner looking to buy or sell under 100 mining rigs. “Institutional Miners” are attempting to buy or sell 100+ mining rigs. Many talking heads and news outlets have attributed the March - April increase in Bitcoin Spot Price and trading volume to manipulation, an April Fool’s joke, and short squeezes. They draw conclusions that the March - April rally was unwarranted but recent mining rig procurement data is providing strong signals of a Bitcoin market bottom. There has been significant investment in Bitcoin Infrastructure through the procurement of mining rigs over the past 4 months. These sales volumes and capital injections by Institutional Investors cannot be faked. Blockware Solutions, LLC facilitates these transactions with manufacturers and also resells to domestic miners. To support the conclusion drawn from our sales data, we analyze the following:

1. Patterns and characteristics that frequently exist in market tops and bottoms.

2. Observations during the 2017 Bitcoin Bull Market.

3. Observations in the 2018-2019 Bitcoin Bear Market.

4. Investment in Mining and investment in Bitcoin Correlation.

Background

Blockware Solutions, LLC is a Blockchain Infrastructure Company and Advisory Firm. An industry leader in Bitcoin and Cryptocurrency Mining Services including hardware procurement, mining rig colocation, and Mining & Staking Pool Operations. We are presently the 2nd largest Validator for the Loom Network and one of the larger mining pools for Aion Network.

Blockware Solutions is one of the most active brokers of mining rigs in North America, assisting clients with the acquisition and sale of mining rigs directly from Foreign Manufacturers and through trusted Peer-to-Peer Channels. This sales volume and community engagement has established an extensive network ranging from America’s largest Bitcoin Miners to the part-time hobbyist. We believe the transactions, behavior, and sentiment of this network provides insightful signals into the future trend of the Bitcoin Spot Market.

Characteristics of Market Tops and Bottoms

Market cycles have several phases. We will focus on market tops and market bottoms as they are turning points that produce the greatest divergence between Retail and Institutional Investor behavior. During these turning points, the largest transfer of assets between Retail and Institutional Investors tend to occur.

*Exhibit 1 - The Gartner Hype Cycle: a graphical and conceptual presentation of the maturity of emerging technologies through five phases.*

Top after top and bottom after bottom the Retail Investor is on the wrong side of the trade, regardless of the asset class. At market tops, when euphoria is at its highest, outflows (selling of the asset being traded) tend to accelerate for Institutional Investors while inflows (buying of the asset being traded) are at their peak for Retail Investors. The inverse is true at market bottoms. During the “Despair Phase” institutions begin to accumulate the asset, whereas outflows are at their peak for Retail Investors. Exhibit 2 illustrates this dynamic during the 2001 and 2008 equity market crashes.

Exhibit 2 - Retail Investors vs Markets chart

This pattern is a simple function of human psychology and is frequently repeated across asset classes. Nobel Prize winning economics concept: “Prospect Theory,” suggests that people make decisions based on potential losses and gains rather than rational expectations of the outcomes. Irrational investment decisions especially occur during extreme market environments. Towards the end of bull markets Retail Investors become overenthusiastic as they are late to the party, while a majority of institutions (a bulk of the capital) have already established their positions. The Retail Investor is the last buyer, therefore, all buying power is now exhausted creating an imbalance in favor of sellers. This imbalance establishes market tops. The inverse is true at market bottoms; however, the Retail Investor is again the last to act. As a result of the significant price decline during prolonged bear markets Retail Investor pessimism tends to become most extreme near the bottom, at which time they throw in the towel - liquidating their positions. This results in the majority of selling becoming exhausted and an imbalance in favor of the buyers. The bottoming process of the asset is then allowed to run its course and create the foundation of the next bull market.

The 2017 Bitcoin Bull Market

During the 2017 Bull Market we witnessed one of the most powerful speculative manias in modern history. This was fueled mainly by retail participation. Bitcoin began 2017 at $973.37 and hit a high of $19,891.99. An observation, based on our sales data, is that Bitcoin Mining Rigs are almost perfectly positively correlated with the price of Bitcoin. During the 2017 Bull Market, the most popular mining rig, the Bitmain Antminer S9, had appreciated in sales price from $1,265 to a high of $2,725. These were listing prices directly from the manufacturer. On domestic reseller markets however, the correlation was even more pronounced. S9’s were selling between $2,500 to as much as $8,000 per rig, as there were commonly shortages in supply. Ebay, Craigslist, and similar platforms were often leveraged by resellers to target Retail Miners looking to purchase 5 to 100 mining rigs. With a majority of Bitmain’s mining rig sales occurring during Q3 of 2017 through Q1 of 2018, many retail miners bought the highs, as Bitcoin, and mining rig prices began their sharp and steady decline.

It is no coincidence that the last rally in the 2017 Bull Market began 2-3 days after Thanksgiving and topped shortly after the Holidays. Retail Investors who learned about Bitcoin from family members over the holidays provided the final push as the last investors in creating exhaustion of buying.

Exhibit 3 - Mining Rig Price vs Bitcoin Price

The 2018-2019 Bitcoin Bear Market

The price of Bitcoin Mining Rigs declined steadily over the course of 2018 through early 2019, again exhibiting an almost perfectly positive correlation to the price of Bitcoin. Over the past several months, however, mining rig prices have recovered mildly from their January 2019 lows. This price appreciation is attributable to the rebound in Bitcoin price and increasing demand for mining rigs from Institutional Miners.

Institutional Miners have been purchasing increasingly large quantities of mining rigs through Peer-to-Peer Channels, while Retail Miners continue to provide the liquidity, selling rigs for 15 cents on the dollar. This dynamic is evident when comparing the frequency and quantity of buy and sell inquiries fielded by Blockware Solutions. There is no shortage of miners looking to sell small to medium quantities of mining rigs, unsurprising, given the depth of the Bitcoin Bear Market. The interesting development however, has been the significantly greater number of “Buy” inquiries, for increasingly large quantities of mining rigs over the past several months. An observation that we believe supports the argument in favor of a market bottom, as these large purchases fit the criteria of institutional accumulation. We are witnessing retail capitulation to continue, and even accelerate, while a new wave of Institutional Miners accumulate more mining rigs, positioning their mining operations to lead during the next bull cycle.

Conclusion

Based on Blockware Solutions data and high sales volume, we have witnessed a reliable signal of Retail Miners selling their mining rigs at radically discounted prices while Institutional Miners step in and procure these cheap rigs. This is common in the “Bottoming Phase” of market cycles. There is significant overlap between the investors deploying capital in mining and those purchasing Bitcoin off the spot market. Venture Capital, Private Equity, and Hedge Fund capital commonly gets deployed to both types of investment opportunities: mining and owning the Bitcoin Asset. Based on Blockware Solutions’ mining rig sales numbers we know these capital deployments are not fake. We can also assert that institutional accumulation has accelerated, as Blockware is collecting the funds, reselling equipment and facilitating transactions. By connecting the buyers and sellers it is clear that the majority of selling is coming from the retail side and distressed facilities. These distressed facilities are mining operations that launched in 2017 and 2018 that had not conducted adequate due diligence and therefore ran inefficient operations: spending excessively on mining rigs and facility build-out

Institutional Investors deploying capital to mining operations most often deploy capital towards Bitcoin as well. Based on that dynamic we conclude that the present investor sentiment, behavior and transactional activity of Retail and Institutional Investors in the Bitcoin Mining Rig Market can be projected on the Bitcoin Spot Market. We conclude that a bottom in the Bitcoin Mining Rig Market signals a high probability of a bottom in Bitcoin.

Co-Authored by: Matt D’Souza, Sam Chwarzynski, and Mason Jappa

The Mining Market is Not Immune to Human Psychology

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