Bitcoin Mining Difficulty Drops After China’s Hashrate Crash

Bitcoin mine on the edge of the Tibetan Plateau near Sichuan, China. The mine is strategically located next to a hydraulic power generator.

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It just became a lot easier and a lot more profitable to mine bitcoins.

The world has known for months that more than half of the world’s bitcoin miners would shut down as China cracked down on mining. Now that it has happened, the bitcoin algorithm has been adjusted accordingly to ensure that miners’ productivity does not continue to fall off a cliff.

That adjustment, which went into effect Saturday morning, also means more cash will go to bitcoin miners who stay online.

“This will be a revenue party for the miners,” said bitcoin mining engineer Brandon Arvanaghi.

“Suddenly, they own a significantly larger slice of the pie, which means they earn more bitcoins every day.”

Easier mining

A bitcoin miner runs a program on a computer to try to solve a puzzle before anyone else. Solving that puzzle is what completes a block, a process that creates new bitcoins and updates the digital ledger by keeping track of all bitcoin transactions.

China had long been the epicenter of bitcoin miners, and previous estimates indicated that Between 65% and 75% of the world’s bitcoin mining occurred there, but a government-led crackdown has effectively banished crypto miners from the country.

For the first time in the history of the bitcoin network, we have a complete closure of mining in a specific geographic region that affected more than 50% of the network, “said Darin Feinstein, founder of Blockcap and Core Scientific.

More than 50% of the hashrate, the collective computing power of miners around the world, has dropped from the network since its market peak in May.

Fewer people mining means fewer blocks are solved each day. It usually takes about 10 minutes to complete a block, but Feinstein told CNBC that the bitcoin network has slowed down to block times of 14 to 19 minutes.

This is precisely why bitcoin is recalibrated every 2016 blocks, or roughly every two weeks, resetting how difficult it is for miners to mine. On Saturday, the bitcoin code made it 28% less difficult to mine, a historically unprecedented drop for the network, thus restoring lock times to the optimal 10-minute window.

The bitcoin algorithm is programmed to handle a rise or fall in mining machines, according to Mike Colyer, CEO of digital currency company Foundry. “It is a self-regulating market that does not require any external committee to determine what to do. This is a very powerful concept, ”he said.

Fewer competitors and less difficulty means that any miner with a machine plugged in will see a significant increase in profitability and more predictable revenue.

“All bitcoin miners share the same economy and are mining on the same network, so both public and private miners will see an increase in revenue,” said Kevin Zhang, former director of mining at Greenridge Generation, the first major US power plant to start mining behind the subway on a large scale.

Assuming fixed energy costs, Zhang estimates $ 29 per day revenue for those using the state-of-the-art Bitmain miner, up from $ 22 per day before the switch. In the longer term, although miners’ income may fluctuate with the price of the coin, Zhang also noted that mining income has fallen only 17% since the peak of bitcoin’s price in April, while the price of the coin has dropped about 50%.

“We look forward to a much longer period of mining profitability for Compass Mining customers,” said Whit Gibbs, CEO and founder of Compass, a bitcoin mining service provider. “We expect miners to be roughly 35% more profitable.”

Blockcap’s Feinstein agrees. “We expect an increase in revenue and earnings for the foreseeable future. This was an unexpected gift to the network, not only in revenue, but also in decentralization and sustainable energy metrics. “

Although the drop in difficulty benefits all miners, those using new-generation equipment benefit the most.

Feinstein tells CNBC that most of the equipment in China that was shut down was old-generation equipment, which is inefficient and operates with much smaller profit margins.

Six month increase

It is difficult to predict how long the hashrate deficit will last. Barbour said it is entirely possible that Beijing could simply reverse its policy, and this could only be a short-term disruption.

Otherwise, most mining crypto experts agree that it will take six to 15 months for all that idle and displaced mining hardware to migrate. “It’s going to take a long time for the surplus to find a home,” Barbour said.

Gibbs believes that miners should see higher revenues for at least the remainder of 2021.

“Every day, Chinese miners are looking around the world for places to turn their machines back on. Space is very limited at the moment, ”Colyer said.

Part of the problem, according to Feinstein, is that even before China shut down mining, there was already a lack of infrastructure to house the next-generation miners that were deployed monthly by Beijing-based manufacturer Bitmain.

Now that the market is flooded with a glut of used mining rigs, it’s hard to say how quickly countries will be able to absorb the influx of equipment.

“Some mining companies had already built everything and were waiting for these ASICs to connect, which would only take a couple of days,” Arvanaghi explained.

Others may need to build containers, expand warehouses, or increase their energy capacity. We will not see the hashrate reach what it used to be overnight, but we will see it rise again in the coming months, “he continued. .

Of all the possible destinations for this team, the United States seems to be especially well positioned to absorb this lost hashrate. CNBC is told that major US mining operators are already signing deals to patrol some of these Bitmain homeless miners.

The US bitcoin mining is booming and has venture capital flowing into it, so they are ready to take advantage of the miners’ migration, Arvanaghi told CNBC.

“Many US bitcoin miners who were funded when the price of bitcoin started to rise in November and December 2020 means that they were already developing their energy capacity when the mining ban was imposed in China,” he said. “It’s a great moment.”

But Barbour believes that much smaller players in the residential United States also have the opportunity to capture these excess miners.

“I think this is a sign that in the future, bitcoin mining will be more distributed out of necessity,” Barbour said. “Fewer mega mines like the ones over 100 megawatts that we see in Texas and more small mines in small commercial and eventually residential spaces. It is much more difficult for a politician to close a mine in someone’s garage ”.

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