Bitcoin mining difficulties diminish after hashrate collapse in China


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

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It just got a lot easier and a lot more profitable to mine for bitcoin.

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

The adjustment – which took effect early Saturday morning – also means more money will flow to bitcoin miners who stay online.

“It will be a party for the miners,” Bitcoin mining engineer Brandon Arvanaghi said.

“They suddenly have a much bigger slice of the pie, which means they’re making more bitcoin every day.”

Mining made easy

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

China has long been the epicenter of bitcoin miners, with past estimates indicating that 65% to 75% of the world’s bitcoin mining has occurred there, but a government-led crackdown has effectively banned crypto miners from the country.

For the first time in the history of the bitcoin network, we have a complete halt to mining in a targeted geographic region that has affected over 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 left the network since its market peak in May.

Fewer people mine means fewer blocks are resolved each day. Typically, it takes around 10 minutes to complete a block, but Feinstein told CNBC the bitcoin network has slowed to block times of 14-19 minutes.

This is precisely why bitcoin is re-calibrating every block of 2016, or roughly every two weeks, resetting the difficulty for miners to mine. On Saturday, the bitcoin code automatically made mining by around 28% less difficult – a historically unprecedented drop for the network – thus restoring block times to the optimal 10-minute window.

The Bitcoin algorithm is programmed to handle an increase or decrease in mining machinery, according to Mike Colyer, CEO of digital currency company Foundry. “This is a self-regulating market that doesn’t require any outside committee to figure out what to do. It’s a very powerful concept,” he said.

Fewer competitors and fewer difficulties mean that any miner with a machine plugged in will see a significant increase in profitability and more predictable income.

“All bitcoin miners share the same economy and operate the same network, so both public and private miners will see an increase in their income,” said Kevin Zhang, former mining manager at Greenridge Generation, the world’s first major power plant. American to start mining behind the counter on a large scale.

Assuming fixed energy costs, Zhang estimates income of $ 29 per day for those using the latest generation Bitmain miner, up from $ 22 per day before the change. Longer term, although miners’ incomes may fluctuate with the price of the coin, Zhang also noted that mining incomes were only down 17% from the peak in the price of bitcoin in April, as the coin price had fallen by about 50%.

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

Blockcap’s Feinstein agrees. “We expect increased revenues and profits for the foreseeable future. This is an unexpected giveaway for the grid, not only in terms of revenue, but also in terms of decentralization and sustainable energy measures. . “

While the lower difficulty benefits all miners, those using new generation gear benefit the most.

Feinstein told CNBC that most of the equipment in China that has been turned off was old-generation equipment, which is inefficient and operates with much lower profit margins.

Six-month surge

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

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

Gibbs believes miners should see their incomes increase 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 halted mining, there was already a lack of infrastructure to house the next-generation miners deployed monthly by Beijing-based manufacturer Bitmain.

Now that the market is inundated with an oversupply of used mining rigs, it’s hard to say how quickly countries will be able to absorb the influx of gear.

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

“Others may need to build containers, expand warehouses, or increase their electrical capacity. We won’t see the hash rate rise to what it was overnight, but we will see it pick up again in the next few months. “, he continued. .

Of all the possible destinations for this gear, the United States appears to be uniquely positioned to absorb this wandering hashrate. CNBC learns that major US mining operators are already signing agreements to repatriate some of these homeless Bitmain miners.

Bitcoin mining in the United States is booming and receiving venture capital, so they are ready to profit from the migration of miners, 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 building up their electrical capacity when the ban on mining in China came down. took effect, ”he said. “It is the right time.”

But Barbour believes much smaller players in the residential United States also have a chance of capturing these surplus miners.

“I think this is a signal that in the future bitcoin mining will be distributed more out of necessity,” Barbour said. “Fewer mega-mines like the 100+ megawatt ones we see in Texas and more small mines in small commercial and possibly residential spaces. It is much harder for a politician to shut down a mine in someone’s garage. a.”

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