Altcoin Implosion As $5bn BTC Liquidation by Bitcoin Miners Looms

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Yesterday, we published a critical note warning our subscribers about Altcoin exposure. Several crypto news sites have picked up this story, which could have had an impact; several altcoins have dropped -15% to -20% without any real crypto news.

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Bitcoin Miners Could sell $5bn of BTC post halving – Altcoin Graveyard?

👇1-18) The crypto market could face a significant challenge in a six-month ‘summer’ lull as Bitcoin miners prepare to sell off substantial portions of their BTC inventories. These inventories, painstakingly built over the past few months, could disrupt the market dynamics.

👇2-18) This is a typical scenario ahead of the halving (April 20), where miners stock up on BTC, leading to a supply/demand imbalance and a subsequent rally in Bitcoin prices.

👇3-18) As we wrote two months ago, Bitcoin tends to rally +32% into the halvings. However, based on our calculations, miners will potentially liquidate $5bn worth of BTC after the halving. The overhang from this selling could last four to six months, explaining why Bitcoin might go sideways for the next few months—as it has done following past halvings.

Altcoins, in particular, could bear the brunt of this situation.

Bitcoin traded sideways after the 2020 Bitcoin halving

👇4-18) Consider the data: since the peak of the November 2022 bull market, Bitcoin’s dominance has surged by +15%, accounting for 53% of the crypto market capitalization. In contrast, altcoins have experienced a -9% decline, with no signs of a reversal. Even if there is a correlation between the halving and an altcoin rally, as some predict, historical evidence shows that the rally typically begins almost six months later.

Unusual to see Bitcoin dominance increasing during a bull market

👇5-18) We can outline two plausible scenarios for the current market by analyzing historical patterns. The first scenario suggests that we might be at the initial stages of a bull market, with altcoin outperformance expected to follow the halving by six months. The second scenario, however, indicates that we could still technically be in an altcoin bear market (relative to BTC) despite a few tokens showing promising returns as the altcoin dominance indicator fails to rally.

👇6-18) Acknowledging the potential implications of Bitcoin's dominance in the market is crucial. If this bull market is indeed over (a scenario that is not widely believed, including by us, but which we can never rule out), Bitcoin’s dominance could surge further, potentially making many altcoins irrelevant. This pattern has been observed at each bull market peak (orange).

👇7-18) Therefore, considering the evolving market dynamics and the failure of the altcoin dominance indicator to rally at this point, we strongly advise only considering super high-quality altcoin holdings (if at all) and Bitcoin as long-term strategies.

👇8-18) Although Bitcoin mining costs vary significantly among miners, most Bitcoin mining occurs in pools that do not disclose their actual cost basis. Approximately 1 BTC ($70k) is mined after the halving for a cost basis of $49k. Marathon (around 3.3% of the Bitcoin mining market share) indicates an all-in production cost of $23k, which will change to $46k after the halving. Those costs are volatile due to outages, efficiency, electricity costs, changes in the hash rate, mining difficulty, etc. But let's work with this $49k number for now.

👇9-18) Historically, the BTC price-to-BTC production cost ratio has peaked roughly two to three times. For example, at the November 2021 peak, the industry cost was $27k, while BTC traded at $61k (2.2x). At the 2017 peak, the BTC price was $17k while the cost was $5k (3.4x).

👇10-18) Therefore, from a ‘peak’ bull market point of view, Bitcoin could trade roughly 2.5x above its $49k production cost ($122k) at the peak of this bull market (post-halving). Suppose we associate a multiple of 3x for the BTC price-to-production ratio for Marathon’s $23k per BTC. In that case, we reach a stretched BTC price target of $69k BEFORE the halving, roughly where BTC is currently trading.

👇11-18) This $122k post-halving level could be the North Star if the bull market continues; a higher Bitcoin price (for this cycle) seems extremely unlikely based on the historical analysis of the production-to-BTC cost ratio. The cyclicality of this indicator also reveals why many miners have gone bust over the years after revenues dropped off post-halvings.

👇12-18) For example, after the May 2020 halvings, BTC traded at $10k while producing 1 BTC cost $14k. Over time, the cost declined back to $10k. This can be explained by less competition or because miners were using their inventory to sell BTC, and therefore, their actual sales numbers looked better after the halvings; it also took six months after the halving for the BTC price-to-production ratio to climb (that’s when miners make money). Again, we are marking assumptions and are working with only a few data points because of the brief history of this industry.

👇13-18) The top three listed miners account for 74% of the industry reserves, and Marathon Digital has increased its BTC inventory from 9.4k in 2022 to 11.5k in 2023 to 17.4k in March 2024. Although Marathon’s six-month inventory ratio has declined from 8k BTC at the end of 2021 to just 1k BTC until mid-2023, since July 2023, the company has built inventory by 4-5k BTC that will likely be gradually sold after the halving to prevent a revenue cliff from occurring.

Marathon accelerated their BTC inventory building (LHS) since July 2023

👇14-18) As Marathon produces 28-30 BTC per day, this could result in 133 days (4k inventory / 30 BTC inventory liquidation per day) of additional supply hitting the market – PLUS the BTC they produce, which is then 14-15 BTC per day. Although Marathon has the largest inventory (by far) among the publicly listed miners), other miners will likely follow a similar strategy to liquidate part of their inventory gradually.

👇15-18) Marathon only accounts for 3.3% of Bitcoins being mined daily (30 BTC by Marathon vs. 900 total mined daily) and could sell daily $3m worth of BTC post halving ((30 inventory + 15 newly mined) * $70k = $3m). If all miners have a similar strategy to sell inventory post-halving, this could result in a maximum of $104m ($3m/3.3%) of BTC selling per day – reversing the supply/demand imbalance that caused BTC to rally pre-halving.  

👇16-18) We could see $25-50m of BTC selling per day for four to six months after the halving ([$25m * 133 days] or $3.3bn to $6.5bn or roughly $5bn total). In anticipation of this revenue cliff, publicly traded miners are underperforming the price of Bitcoin.

👇17-18) Does this make us bearish Bitcoin? Not necessarily, but there will be a persistent seller post-halving in the market; nobody should argue with this. We can still envision higher Bitcoin prices likely capped by the 2-3x production cost ratio ($69k pre- or $122k post-halving). Bitcoin could also end up in a dull, sideways ‘summer’ lull. This is usually when the enthusiasm for altcoins dies.

👇18-18) We should be prepared for either scenario.

Investors priced in revenue cliff for miners - MARA 61% cheap vs. BTC