Bitcoin stuck in 2-day rut at $7,300, as analysts ponder mining sea change

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Updated: 03 December 2019

Cyber Monday has come and gone. Equity markets took a dive today on poor manufacturing data in the U.S. and the fear that China trade talks are languishing. Bitcoin, on the other hand, had one of its most boring days ever, tracking so close to $7,300 for a 48-hour time span that you had to refresh your screen to be sure you really saw what you saw. The Internet seemed to plod along, as well, perhaps due to traffic on this online shopping day of days. To counter the boredom, analysts began looking for things to worry about and zeroed in on a new theory related to Bitcoin mining.

Before getting into what’s new on the mining front, the ambivalence that pervaded the analyst community yesterday seemed to hang like a cloud for an extended period of time. Neither camp, whether the optimists or the pessimists, was willing to give up any hard won ground, choosing rather to stick by their opinions from the weekend. If there was any movement in the narrative, it was only from the prophets of doom that insisted that technical analysis theory favors signals from longer timeframes.

I recall longer timeframe signals were more creditable due to less “noise”, but the offset was that longer timeframes were “laggards” – the influence of current price behavior was muted. Weekly and monthly charts definitely look bearish, and it would take an inordinate amount of time to turn those “supertankers” of the chart world around on a dime. Hourly and 4-Hour charts can be too hectic, as well, which leaves us with the old tried and true Daily chart to get happy about:

This “dual” chart, courtesy of CoinDesk, illustrates a few nuances in different timeframes that will at least be closer to current market action in their various depictions. The hourly presentation does look grim, until the last 48 hours where you can spot a glimmer of a positive slope. The lack of volume, however, spoils the party. The upward slope is more visible on the Daily chart, as is the MACD Histogram moving into green territory. Do these positive signs outweigh the bearish signals of weekly and monthly charts? This seeming contradiction between the “long and the short of it” will soon be resolved.

The folks over at Forbes, however, are sending up warning flares about a new paper, co-authored by Michael Dubrovsky, cofounder of the nonprofit foundation PoWx, Marshall Ball from Columbia University in New York, and Bogdan Penkovsky of the University of Paris-Saclay in France. It has been estimated that Bitcoin mining consumes as much electricity as Switzerland. These fellows purport that a sea change could occur if miners switched to “photonic-chips, optical computers, and a revised encryption protocol, called HeavyHash”.

The researchers argue that Bitcoin’s power hungry “proof of work” mining process   should morph into what they call an “optic proof of work” scenario: “Heavy reliance on electricity has created scalability issues, environmental concerns, and systemic risks for bitcoin. Mining efforts have concentrated in areas with low electricity costs, creating single points of failure. Although proof of work security properties rely on imposing a trivially verifiable economic cost on miners, there is no fundamental reason for it to consist primarily of electricity cost.”

The authors contend that there has been “rapid growth and improvement in silicon photonics over the last two decades”. These technological advances in their view could easily “eliminate energy as the primary cost of mining”. In this perfect world, environmentalists might actually rally behind the digital revolution rather than protest its very existence. Miners could then focus on hardware and a much lower breakeven point with respect to operating expenses and potential reward revenues.

There are some that hear this new “argument” and conclude that lower mining financial breakevens imply a lower Bitcoin price. Hashrate totals may undergo a change, as well, especially regarding their ability to influence Bitcoin prices. How low are these “pessimists” suggesting as a new bottom for Bitcoin? They look to last year and predict that $3,000 might be the new floor that must be revisited.

At this stage, analysts are chasing ghosts in the shadows. Photonic chips are very much like quantum computers – great ideas, but it will take time before deliverables come down the production lines and make inroads into the status quo. In fact, photonic chips, powered by light instead of electricity, are at the heart of quantum computers, suggesting a synergism that might require twice the time from design to real life solutions.

As for Bitcoin’s new bottom, George McDonaugh, managing director of publicly listed bitcoin, cryptocurrency, and blockchain investment firm KR1, shared these thoughts with Forbes: “We essentially went from $5,000 dollars to $13,500 in 3 months and now, like the swing of a pendulum, the market wants to know where the bottom is again. In my opinion we are in the early stages of a bull market, you'll see that the bottom this time around is much higher than $5,000. We will find higher lows all the way back to all-time highs.” The consensus at this moment is that $6,850 might be this new bottom.