October 14, 2022
Greg Cipolaro

Research Weekly - A Cyclical Valuation Indicator Nears the Lows


  • An important indicator of bitcoin price cycles approaches the lows.
  • What the big jump in Bitcoin’s difficulty means for network hash rate and miner revenues.
  • Inflation may be more stubborn than many realize if the period of the 70s and 80s is any guide.

A Cyclical Valuation Ratio Approaches the Lows

The market cap to realized value (MVRV) ratio, a measure of bitcoin’s current market cap to the cost basis of all bitcoins, is reaching levels of previous cycle lows. The ratio has fallen below 0.9 in recent days, a level previously only seen near the lows of bitcoin’s price cycles. The ratio has been one of the most consistent valuation indicators for identifying cyclical tops and bottoms. That is not to say that all is clear for financial assets including bitcoin, especially given the recent inflation news, but as far as relevant cycle indicators go, the MVRV ratio has historically been reliable for bitcoin, and it is suggesting a bottom is near.

Bitcoin’s Difficulty Jumps to New Highs While Hash Price Sinks to New Lows

On Monday, Bitcoin’s difficulty was upwardly revised by 13.6%. The increase in difficulty, which governs how hard it is for miners to find new blocks, is an acknowledgment by the network that miners had been producing blocks at a faster pace than the desired 10-minute average interval over the preceding 2,016 blocks. Network hash rate, a derivative of both the current difficulty and number of blocks produced in a time interval, has zoomed to new all-time highs following the cessation of mining disruptions over the summer months caused by high energy prices, energy curtailment, and idiosyncratic facility issues.

Bitcoin’s difficulty adjustment is a self-regulating feature that keeps block production times from miners at 10 minutes on average amidst varying hash rates. As producing blocks results in the creation of new bitcoins as a reward to the miner, the difficulty adjustment is key to Bitcoin’s supply growth, which is presently at about 1.8% annually. The difficulty adjustment, along with the every 210,000 block reward halving (about 4 years), are the foundation of Bitcoin programmatic supply function that exhausts growth in the year 2140 at 21M bitcoins.

The byproduct of a combination of the growing hash rate and stable bitcoin price is that the hash price, the value of a miner’s hash and the computational unit they supply to the market, has fallen below $0.07/Th/s, a new all-time low. The hash price is calculated as the total revenue paid to miners, the block reward plus transaction fees, divided by the estimated network hash rate.

While a declining hash price has certainly weighed on miner financials, as evidenced by the flurry of restructurings and workouts, breakeven costs for the most efficient mining rigs are still well below current bitcoin prices. For example, the Bitmain Antminer S19 XP bitcoin mining rig, which operates at a near industry best efficiency, has a breakeven cost of below $8,000 per bitcoin at $0.05/KWh electricity. For this reason, as well as lower electricity prices associated with cooler weather, elimination of bottlenecks in the mining rig supply chain, new hosting space coming online, and the freeing up of hosting space previously dedicated to Ethereum GPU mining, we think the Bitcoin network hash rate is likely to continue to see upward movement.

Inflation May Be Tougher to Eliminate Than Pivot Watchers Expect

On Thursday at 8:30 AM ET, the September Consumer Price Index (CPI), a widely followed measure of inflation, was released by the Bureau of Labor Statistics. News of the release, which reported inflation at a higher rate than expected by analysts, immediately sent stocks, bonds, and bitcoin lower and interest rate expectations higher. The initial read from the market was that higher-than-expected inflation numbers would require the Fed to continue its rate-rising campaign to stamp out inflation.

Markets opened at lows for the day and promptly began to rally. Bitcoin hit a low of $18,131 just after the CPI release but then rallied to $19,375 at the close, well above where it was before the inflation data. Our read of the positive price action has to do with the overly pessimistic positioning by traditional and crypto investors rather than any change in the path of inflation.

Looking at the 2-year stacked growth (a technique to tease out changes in year-over-year trends) of core inflation, which excludes food and fuel, it is clear that inflation may be a tougher beast to tame than one might expect. While oil prices are down 27% from the May highs, which contribute to a deceleration in headline inflation (including food and fuel), core inflation has yet to show a meaningful deceleration using 2-year stacked growth. If the inflationary periods of the 1970s and 1980s are any guide, it took then-Fed Chair Paul Volker a second rate-rising campaign to finally squash inflation. A short but sharp recession from January 1980 through July 1980 necessitated a reduction in interest rates that then had to be reversed before inflation was finally quelled.

With that in mind, it should come as no surprise that Paul Volcker’s memoir is titled “Keeping at It: The Quest for Sound Money and Good Government,” a reference to the continued focus that inflation-fighting required. Current Fed Chair Jerome Powell recently gave a speech with a nod to Volcker, saying that “we will keep at it until the job is done.” This implies to us that despite the recent rally in markets, the inflation fight is still likely a long road ahead of us.

Market Update

Despite the market rally on the back of Thursday’s inflation data, most assets were down once again on the week. Bitcoin, which bounced around the $19K - $20K range, fell 3.2% on the week. The inflation report on Thursday initially took bitcoin down to an intraday low of $18,131, but bitcoin rallied significantly on what could be seen as a rally driven by overly pessimistic positioning by traders. Equities fell on the week as well despite the Thursday rally, with the S&P 500 down 2.0% and Nasdaq Composite down 3.8%. Gold fell 2.5% on the week, while oil rose 0.7%. Bonds continue to fail to provide safe haven for investors, with Investment Grade Bonds down 2.0%, High Yield Bonds down 1.7%, and Long-Term US Treasuries down 2.5% on the week. Real yields were mixed, while inflation expectations, which are well below current measures, rose slightly on the week.

Important News This Week

Regulation and Taxation:

FASB Settles on Fair-Value Accounting for Measuring Crypto Assets - WSJ

Bored-Ape Creator Yuga Labs Faces SEC Probe Over Unregistered Offerings - Bloomberg

A "Brief" Tread on Grayscale's Lawsuit Against the SEC - Twitter

Brief Filed by Grayscale in SEC Case - Grayscale

Remarks from OCC's Acting Head on Crypto Assets - OCC

Coin Center is Suing OFAC Over its Tornado Cash Sanction - Coin Center


Tether Slashes Commercial Paper Holdings to Zero - Tether

America’s Oldest Bank, BNY Mellon, Will Hold That Crypto Now - WSJ

Hidden Road Launches Industry-First OTC Prime Brokerage for Digital Assets - Hidden Road

BlockTower Launches $150M Fund Backed by BPI France and Mass Mutual - The Block


BitNile to Launch Bitcoin Marketplace Platform Intended to Reimagine Cryptocurrency Transactions - BitNile

Announcing Coinbase + Google Cloud - Coinbase


Bitmain Announces World Digital Mining Summit 2022 - Bitmain

Spiral, Braiins Establish Working Group to Develop Bitcoin Mining Protocol - Bitcoin Magazine

Luxor Launches Derivatives Product based on Bitcoin Mining Revenue - The Block

Argo Announces Strategic Actions to Strengthen the Company’s Balance Sheet - Argo Blockchain

Crusoe Energy Systems Acquires Great American Mining - Crusoe Energy

Cathedra Bitcoin Provides Operations and Corporate Update - Cathedra Bitcoin

Binance Pool To Support BTC Mining Industry With a $500M Miner Lending Project - Binance

HIVE Blockchain Provides a Corporate Update Post Ethereum Merge, September 2022 Production Update - HIVE Blockchain

Mining Hardware Startup Raises $13M as it Develops New Liquid-Cooled ASIC - The Block

Upcoming Events

October 14th –The Atlanta Bitcoin Conference 2022

November 2nd – Next FOMC rate decision

November 4th – United States Non-Farm Payrolls

November 10th – Consumer Price Index

Thanks for joining us again this week. Please reach out with any questions or comments.

The NYDIG Team

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