Notes 9/13: Bitcoin Falls On Weak CPI Data, ETHW Sputters to Life, and the Max Pain of Mining Crypto

Crypto markets were awash in a sea of red after the release of unexpected figures for the Consumer Price Inflation (CPI) index.

Bitcoin was down by almost 6% from its price 24 hours ago and trading at $20,964.21. Ethereum tumbled by 9% and is changing hands at $1,583.35. The overall market capitalization of cryptocurrency markets 5.1% to $1 trillion. CPI rose by 0.1% and declined by 8.3% on a monthly and yearly basis respectively. Economists had expected the index to decline by 0.1% and 8.1% on a month-to-month and yearly basis.

Today’s plunging prices are a reversal of yesterday when bitcoin price moved past the $22,000 figure as investors gravitated towards risky assets. The inflation figures are expected to boost the Fed’s case to continue its regime of interest rate hikes at its meeting next week.

In fact, given today’s data, some are betting that the central bank could become even more aggressive in its stance and raise interest rates by 1% instead of the expected 0.75% to counter inflation. “That’s kind of a risk off signal to the market,” said Lawrence Lewitinn at online publication Coindesk.  

The signal is bad news for crypto markets because cryptocurrencies are risky plays that are most attractive when interest rates are low. While events like The Merge – which propelled the recent rally in Ether prices – might provide temporary relief to investors looking to book profits, the overall outlook for cryptocurrencies remains bleak for the rest of this year.

ETHW Sputters to Life

Creating liquidity in a new coin, especially one that has no defined use cases, can be considered a difficult task. But things move fast in the crypto ecosystem. The journey from conception to being listed at crypto exchanges took ETHW, a coin whose sole raison d’etre is to mint profits for miners and investors, less than two months.

TRON founder Justin Sun, , an early supporter of the fork that will create ETHW, donated a million Ethereum tokens to the chain. (Noticeably, the donation failed to move markets). Many exchanges like Coinbase, Poloniex, and Bitfinex, have fallen in line and are trading futures for the token. [It should be available for trading after the Merge].  Meanwhile, investors and traders are loading up on ether because holders of the cryptocurrency will receive ETHW tokens for free. The token has also emerged as a hedge for shorting ETH futures.    

But it has no defined utility within the crypto ecosystem. The ostensible reason for its existence is to compensate miners who maintain Ethereum’s Proof of Work (PoW) chain while the overwhelming majority of its blockchain transitions towards the less energy-intensive Proof of Stake (PoS) consensus mechanism. A ‘difficulty bomb’ that increases its algorithm’s difficult levels will ensure that the PoW chain dies a natural death after a successful migration.

Why, then, does the chain need a token that is doomed? To make bank, silly.

Mining Max Pain

This year has turned out to be a perfect storm of sorts for crypto miners.

Plummeting cryptocurrency prices have eaten into their profit margins and rising electricity costs have increased their operational costs. The share prices of publicly listed crypto mining companies are being hammered and are down by more than 55% this year. Many miners are selling their bitcoin holdings in a crypto winter where prices have crashed by more than 50% from their highs last year.

But Amanda Fabiano, head of mining at Galaxy Digital, tells the Wall Street Journal that the bitcoin mining industry is not at “max pain” right now. What might max pain look like for miners of Bitcoin and Ethereum, the world’s two biggest cryptocurrencies by market capitalization? Ether miners are already experiencing some of it.

Current revenue figures for ether miners are about $20 million a day. In the fevered valuations of 2021, when ether price touched a high of $4,735, they averaged $50 million daily, the WSJ report states. The cryptocurrency’s move to PoS consensus, which does not require mining but, instead, awards coins based on holdings, is another death knell for miners of the cryptocurrency. The head of BitPro, a company that resells mining machines, told Politico that it is like “apocalypse” in the ether mining industry. Ether mining machines use GPU chips that can be repurposed for gaming setups.

What about Bitcoin miners? With the inflow of institutional money into Bitcoin, transaction volumes and numbers will increase. The only hope for miners is scale. And scale is not possible without consolidation. Small firms have dropped out of mining or shut shop during previous cycles of volatility in bitcoin price. This cycle will provide another impetus for more deal making in the mining industry.

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