Looking at the price action on the markets over the past seven days, at least for bitcoin, there is no doubt that the current period of consolidation is ongoing. The exception may be for ETH, which has seen its ratio to BTC improve by nearly 10%. Nevertheless, we feel that some reversal, or at least that the recent period of uncertainty, seems to be coming to an end. Let’s look in detail at what this means for the two largest cryptocurrencies in terms of capitalization.

We won’t dive again into the whole saga surrounding the banning of miners from Chinese territory. Let’s just remember that this major government decision has put many players in the industry in front of a difficult decision. Either they need to quickly migrate out of the country with all the consequent logistical challenges, or they close shop altogether. Presumably, the latter was the choice for many miners. According to a report by The Block, GPUs (used to mine bitcoin) on resale sites are skyrocketing, creating downward pressure on their price. Nevertheless, it is reported that a few miners, using hydroelectric power in particular, are still operating in some provinces.

The obvious consequences? A marked drop in the network’s hash rate. The latter has indeed recorded a drop of 50% compared to its peaks of May 2021, as can be seen on this graph:

As we explained last week, however, the network is programmed to automatically adjust to the computer work pointed at its network. As a result, the biggest difficulty drop in bitcoin history this week led to a 50% increase in daily mining revenue. Daily mining revenue was around $20.7 million on Friday, the day before the difficulty adjustment. A day later, it hit $29.3 million, and by Tuesday this week — $31.9 million.

With such a financial opportunity, it’s easy to see how mining activity will clearly pick up, but better distributed, and now outside of China.

“We have a very interesting dynamic where approximately 50% of the hash power is currently offline and incurring a great number of costs due to logistics and just simply not hashing, having hardware that’s not currently working, and the other 50% has essentially seen half their competition drop off the network,” explains an analyst at Glassnode. “Whilst the protocol’s now issuing the same number of coins as it regularly does, having difficulty wound down, we’re now in a situation where half the network has doubled their income and the other half of the network is essentially producing nothing.”

In short, another successful test showing just how resilient the network is. While we know China’s political and economic reasons behind this maneuver, Michael Saylor believes it was a “trillion-dollar mistake.” In a recent interview with Bloomberg, he explains that  “China had 50% market share of bitcoin and they were generating $10 billion a year, in a business that was growing 100% a year, year-over-year.” He went on to opine that the Chinese government’s crackdown has “squeezed the [bitcoin] industry out of China.”

Now let’s turn to Ethereum and what accounts for its newfound surge. It is undoubtedly the excitement surrounding the London Hard fork scheduled for August 4th, at block #12,965,000, which is fueling the excitement. The latter is a key step in the road to the eventual transition to ETH 2.0. Five technical innovations will be incorporated, the two most important being:

• EIP 1559 introduces a new fee structure to make Ethereum less inflationary. This protocol change is highly controversial because it aims to burn part of the fees, hence decreasing miner revenue.
• EIP 3554 delays Ethereum’s difficulty bomb to Dec. 1. This mechanism will incrementally increase the difficulty of mining on the Ethereum network, effectively “freezing” proof-of-work in preparation for Ethereum’s move to proof-of-stake.

The result of this migration will be a decrease in ETH supply growth, which could obviously cause upward pressure on prices, hence the current bullish speculation.

Goldman Sachs, in a recent report, actually claims that Ethereum could eventually dethrone bitcoin as a store of value. While we strongly doubt this proposition, it is interesting to see it being issued by such a serious player in finance.

Still in relation to the transition to ETH 2.0 finally, let’s note that a single entity was responsible for depositing 100,000 ETH in staking wallets last week. What an attribution of confidence in the future of the protocol and its financial potential! While the identity of this whale is unknown, we can see that the largest portfolios are willing to put their money where their mouth is. Let’s simply say that this is a good omen.

There is not much to say about the technical side of things while we feel our conclusions from the last few letters still apply. Let’s just point out that the supply of bitcoins on the exchanges has reached a six month low. This is an obvious sign of accumulation, while the chances of a sudden massive sell-off are less plausible. All indications are that the majority of investors now share the view that the worst of the correction is well and truly behind us.

Rivemont Investments, manager of the Rivemont Crypto Fund.

The presented information is as of July 7th, 2021, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered.