The Influence Of Human Psychology On The Bitcoin Mining Market

The correlation between human psychology and market cycles

The success of Bitcoin mining, like on other markets that operate via transacting high-risk goods (where the unpredictability of price factor plays an important role in whether the individual will carry big earnings or huge losses), is susceptible to the influence of human psychology. The value of Bitcoin itself, for example, is volatile even though there are frequent analyses trying to predict its price behavior; a big part of this is caused by the fears and speculations of the individuals buying and selling the asset.

The first step into understanding what drives an individual to speculate on an asset’s price is the notion that market cycles go through distinct phases: values fluctuate, dropping until they reach a “bottom”, so they can rise again until a “top”; the cycle then continues. These turn points (of highs and lows) are generally the moments when the largest transfers of assets between Retail and Institutional Investors tend to occur.

According to Blockware Solutions, in Bitcoin mining, we can define a “Retail Miner” as someone who is looking to buy or sell fewer than 100 ASICs. “Institutional Miners” are those trying to buy or sell 100+ ASICs.

The Nobel Prize winning concept of “Prospect Theory” suggests that “people make decisions based on potential losses and gains rather than their rational expectations of the outcomes”, and such irrational investment decisions occur more intensively during extreme market periods. This scenario usually puts the Retail Investor on the wrong side of the trade: towards the end of bull markets (high and increasing value of the asset), we see an acceleration of outflows for Institutional Investors (selling of the traded asset), while inflows are peaking for Retail Investors, driven by a too late over-enthusiasm.

Being the last ones to act, all buying power is already exhausted creating an imbalance in favor of the Institutional sellers. The contrary is also observed during the “Despair Phase”, when Institutional Investors tend to accumulate the asset, while Retail Investors, again acting too late, try to cash out influenced by the pessimism that results from extreme devaluations of the good.

Another imbalance is created, favoring Institutional buyers. These actions pave the way for the market’s next cycle.

The year of 2017 showcased one of the biggest episodes of the speculative strength in modern history, fuelled mainly by retail participation. Bitcoin prices started the year at $973.37 and hit an impressive high of $19,891.99.

Sales data retrieved by Blockware Solutions showed that the price of Bitcoin ASICs almost perfectly correlated to the price of the asset itself. The market in rapid appreciation drove hardware prices up, tripling prices from the equipment sold by resellers to the public.

Bitmain, one of the biggest mining rigs seller in the market, saw most of its sales during Q3 of 2017 until Q1 of 2018; a large portion of those sales was due to retail participation after increased enthusiasm during the holiday season at the end of the year. Not surprisingly, the price of Bitcoin and hence that of the mining machines started its sharp decline shortly after.

The price of Bitcoin miners continued falling lower until 2019. In the past few months, however, Institutional Miners, driven by the market’s signs of recovery, have been buying large quantities of mining rigs while Retail Miners provide this liquidity. These large purchases fit the criteria of institutional accumulation, with players positioning their mining operations to lead during the next bull cycle.

Institutional Miners took advantage of the cheap hardware prices provided by despair-struck Retail Miners; common behavior during the “Bottoming Phase” of market cycles. With that, institutional accumulation has accelerated, while the data shows that the majority of the selling comes from the retail side as well as from distressed facilities (in financial trouble after inefficient operations, spending too much on mining rigs).

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