Miner Capitulation Explained

Profitability for miners in Bitcoin depends on the price of Bitcoin and how much it will cost them to purchase electricity. Less productive miners are ejected from the network when the price falls because the bitcoins they earn do not justify the expense of mining. For the purpose of selling them in a bull market and getting the most money for them, many miners keep part or all of the bitcoins they produce. According to the theory behind the "miner capitulation" scenario, as the price falls and certain miners are ejected from the network, they will sell these reserve bitcoins, which would drive down the price even more.

In the worst case, this might lead to a "death spiral" in the price of bitcoin as a result of ongoing selling pressure and a cascading effect in which the lower price shuts down increasingly effective mining operations until none are left.

Despite numerous instances in history where the price of Bitcoin lost more than 50% of its value in a couple of weeks, this death spiral has never happened. This result is due to a straightforward cause: Large financial sources enable healthy mining businesses to weather the tough times and carry on mining. In order to maintain stable and cheap energy rates, they also bargain long-term contracts with power companies. Both of these enable miners to hold bitcoins in reserve so they don't have to sell them during a bad market in order to maintain their business.

Short-term price declines do cause inefficient miners to fail, although this rarely significantly impacts the major players. The selling pressure ends and the hashrate and difficulty stabilize once all the ineffective miners have left. More productive miners might buy the hardware from the unsuccessful inefficient miners and utilize it to increase difficulty and hashrate. This is the reason why historical difficulty tends to increase.