The stagnation of the cryptocurrency market has put Bitcoin’s (BTC) price at risk of further decline, as it struggles to recover beyond key resistance levels. A descending price increases the probability of the so-called “miner capitulation” occuring, which is said to have triggered the major BTC drop in December 2018.

Late last year, the Bitcoin price fell to around $6,000 following three months of stability in a tight range between $6,000 and $6,500. The subsequent drop to the $3,000s happened within the span of just one month.

Why miner capitulation occurs?

Miner capitulation occurs in the Bitcoin market when mining is no longer profitable. As profitability drops, miners naturally sell their Bitcoin holdings, capitulating as a response to worsening market sentiment. If miners begin to sell off, it creates significant selling pressure in the market. Such pressure creates a difficult environment for major cryptocurrencies like Bitcoin to maintain their momentum.

Large mining centers and companies are unlikely to capitulate due to a short-term price slump, as they hold long-term contracts with electricity providers. They also have more capital to deal with instability in the market for an extended time period.

Meanwhile, short-term capitulation among smaller mining companies is likely. Major mining firms closing down one after another could lead to a death spiral in which the Bitcoin network’s hash rate drops to near-zero.

However, as security and cryptocurrency researcher Andreas Antonpoulos previously said, a death spiral or an abrupt drop in the hash rate of the Bitcoin network to near-zero is not likely to happen because miners operate with long-term perspective and strategy. He explained, “Part of the reason that’s unlikely to happen is that miners have a much more long-term perspective.”

Hence, when short-term miner capitulation occurs — similar to late 2018 — the market tends to recover in six months to a year. Currently, it is still premature to predict whether miner capitulation will occur heading into the year’s end. However, if negative sentiment around the market is carried onto the first quarter of 2020, a December 2018-esque capitulation could occur in the upcoming months.

Bearish targets for Bitcoin

Prior to last week, when the Bitcoin price was clearly in an intense downtrend following a brief spike to $10,600 on Oct. 26, many technical analysts predicted a further drop to the $5,000 to $6,000 region.

Crypto trader Eric Thies, for instance, said last week that a key bearish indicator lit up, noting that Bitcoin is due for a deep pullback in the near future. Subsequent to an awkward price action for over two weeks, during which Bitcoin demonstrated extreme volatility, Thies said that BTC could be setting up for a recovery after tweeting on Dec. 1 that the outlook was not great. The analyst emphasized that the current structure is “potentially significant for bulls,” not dismissing the scenario of BTC rebounding strongly to higher resistance levels.

DonAlt, a cryptocurrency trader, said that while it is too early to state that Bitcoin is on track for a full recovery, it would have to reclaim higher time frame levels to engage in any meaningful upside movement.

Higher time frame resistance levels for Bitcoin sit between $7,600 and $8,500, and according to DonAlt, BTC passing those levels in the short-term would indicate a bullish movement. He said, “Now that heads have cooled off, the bullishness has quickly faded. So far, this is a bearish retracement after a huge impulse down.”

Big mining companies are having a difficult time

The break-even price of Bitcoin mining is estimated at around $4,100 to $4,500. According to Miner Hut8, a publicly listed mining giant based in Canada, the firm has mined Bitcoin at a cost of $4,300 throughout the third quarter. The company stated:

“Revenue of $26.7 million; Mining Profit Margin of 58%, and Adjusted EBITDA of $14.7 million. Mined 1,965 Bitcoin at a Cost per Bitcoin of US$4,363 inclusive of electricity costs, mining pool fees, and all other production costs.”

However, cryptocurrency researcher Ceteris Paribus noted that the cost of mining calculated by Miner Hut8 “leaves out depreciation, expenses, and net finance expenses,” which could place the actual cost of mining at $7,100. The researcher added:

“Short-term if the price goes under $7.1k they will keep mining as this is still > operational costs & mining equipment is a sunk cost. But long-term you can’t imply that they are profitable <$5k. They will need to replace equipment, continue paying employees, financing costs, etc.”

The decline in Bitcoin’s price and the increase in mining difficulty has had a negative effect on the mining profit margins of Hut8 as well as other major mining firms. Due to their large Bitcoin holdings and cash reserves, large mining facilities are not at imminent risk of having to reduce their operations to cope with a declining Bitcoin price.

Still, the tough ecosystem developing before miners could take a toll on smaller firms, especially if BTC falls to the $6,000s, a price range that is below the break-even point for most producers.

Halving won’t have an immediate effect

One of the most highly anticipated events of 2020 is the block reward halving of Bitcoin in May. The mechanism, which gets triggered once every four years, would effectively drop the compensation miners receive for mining blocks that contain BTC transactions by half. It also decreases the rate of new BTC production as the network approaches its fixed supply of 21 million Bitcoins.

Since 2018, the halving has been talked about as the next driving factor of an extended Bitcoin rally. As a scarce asset, any event that decreases the supply of the cryptocurrency would theoretically impact its price trend. However, high profile investors have said that the halving is not likely to have any immediate effect on the Bitcoin price.

Related: BTC Miners: No More Basement Rigs, Greater Profits to Come

If the halving occurs without imposing a positive impact on the price of Bitcoin, it would place additional pressure on miners to adopt better infrastructure and efficient equipment to try to further decrease the costs.

Throughout history, the halving has not led to a large rally for Bitcoin until a year or two after the event, possibly because it is priced in well before the event occurs. As such, it is possible that the capitulation of small miners lead to BTC testing lower level supports in the $5,000 to $6,000 region despite being down substantially since mid-2019, creating negative sentiment around the cryptocurrency market in early 2020.

The current price trend of Bitcoin

Based on fundamentals, Bitcoin remains strong in various key areas including user activity, transaction value denominated in dollars, and hash rate. Official on-chain data from Blockchain.com shows that the number of unique addresses used has increased from 310,000 in January 2019 to nearly 500,000 in less than 12 months. The hash rate has also increased, from 41 exahash in January to 92 exahash, more than doubling in the same period.

Bitcoin network hash rate. Source: blockchain.com

Due to the fundamentals, Bitcoin investor Timothy Petersen said that the “2019 bubble” of Bitcoin is likely to burst in about two weeks, marking a potential local bottom by year-end. Hence, if BTC begins to demonstrate an intense sell-off in the weeks to come, the most probable cause of the drop would be capitulation by smaller mining firms. Mining capitulation is also seen as a positive point for medium to long-term recovery by many investors, as it often marks the end of a bear market and the start of an accumulation phase.