Understanding Bitcoin Hash Rate Increases – Bitcoin Magazine
This is an opinion editorial by Alex, a bitcoin miner with Kaboomracks.
It is important for individuals looking into bitcoin mining for the first time to understand the importance of Bitcoin’s difficulty adjustment as well as the impact this has on mining profitability. Many newcomers to bitcoin mining will consult the profitability of an ASIC on a mining calculator, expecting that profitability to remain relatively the same going forward into the future. This is a misunderstanding as the profitability of a given machine declines over time. Increase in difficulty should be understood before purchasing an ASIC.
A simple way to understand this is to compare an ASIC to any other electronic device. The longer the device is in use, the less relevant it becomes as new software requires more computing power. If you were to use an iPhone 6 years ago, the performance would be incredibly frustrating. The older the phone gets, the less useful it is.
A very similar process occurs in mining. When you’re mining, you’re competing with all the other miners around the world. As more miners turn on machines, it becomes harder to compete. Having newer and more efficient hardware makes you more competitive, but that hardware is quickly moving towards becoming less competitive.
Image courtesy of coinwarz.com
Bitcoin difficulty adjustment
Bitcoin’s difficulty adjustment is something built into the Bitcoin protocol to ensure that Bitcoin has a stable and predictable supply schedule. If there was no difficulty adjustment, all bitcoin would probably already be mined and there would be little or no incentive for miners to secure the network. As more miners join the network, blocks are minted at a faster rate as a result of a hash rate increase. The network responds by adjusting the difficulty higher to ensure blocks arrive within around 10 minutes. For miners, increased difficulty adjustments mean less profit. For the average Bitcoin user, that means more security for the monetary network they use.
The image is taken from insights.braiins.com
Downward difficulty adjustments mean miners will earn more profits as these are a result of hash rate coming offline. The famous example of this is when China banned Bitcoin mining and a large part of the network’s hash rate went offline for a period of time. Downward difficulty adjustments are not the norm as mining hardware is always becoming more powerful and efficient. Even if there was a stagnation of machine efficiency and hash rate increases, more machines would have been produced and plugged in. The Bitcoin mining industry is incredibly immature and there is a huge amount of room for growth going forward, which means that the hash rate is almost certainly going to increase rapidly going forward in the long term.
We are currently seeing a bull market in energy prices with a depressed bitcoin price, which means miners are experiencing quite a bit of pain. There is a possibility that there could be a series of downward difficulty adjustments as the hash rate comes offline, but this is not something miners should factor into their models. It is important to prepare for the worst-case scenario, which is what we have seen in recent months.
New machines come on the market
Every couple of years, ASIC manufacturers release a new machine with significant improvements in terms of hash speed and efficiency. The recent increases in the network’s hashrate are largely due to Bitmain’s S19 XP and S19 Hydro being deployed. Another factor is that a large amount of older generation machines are finally being turned on as a result of infrastructure being built out.
This diagram is an oversimplification for visual purposes only.
When you buy an ASIC, the value will constantly decrease as both the hash rate increases and new machines come on the market. The value will vary depending on the Bitcoin price, but it is safe to say that the machine loses value over time. That is why it is incredibly important to have the machine running when you have it. Buying it to connect later means you’re throwing money away unnecessarily.
Bitcoin purchasing power
Bitcoin mining is like taking a long position on Bitcoin, but with a lot of headache and execution risk. If done right, it can be incredibly lucrative. Done wrong, it’s a fantastic way to get poor quick. The income the machine earns is fairly consistent, but the purchasing power of that income varies enormously. Power prices can be stable priced in dollars, but are very volatile when priced in the income you earn from that machine. An S19j Pro can earn 38,000-40,000 rate per day in revenue, but if you mine at $0.10 per kWh, your electricity costs will be 41,263 rate with bitcoin trading at $17,461.
This is why it is incredibly important to try to get the lowest possible electricity prices to be profitable and ROI on your equipment. Finding cheap electricity is neither simple nor easy. Often there are hidden fees or complications that cause miners to fail. All miners, no matter how big or small, are exposed to these economies of variable purchasing power, increases in network hash rate, and machine devaluation/obsolescence.
ASIC prices
It is a basic cost for manufacturers to produce new equipment. We are currently at or reaching that floor for new equipment coming from the manufacturer. As a result, they either slow down or stop production of certain models. Individuals choose to pay a premium for new equipment because they come with warranties. Used equipment, on the other hand, usually does not come with a warranty, and also uncertainty about the conditions it was driven in. For this reason, used equipment is often sold at a significant discount.
ASIC prices are variable just like any other industry. Supply and demand are the most important factors that determine the price. Individuals buying ASICs have a million different reasons why they might want to buy at a particular time, but Bitcoin price and difficulty are major influences. If the purchasing power of the income earned by an ASIC is low, there will be less demand and the ASIC price will fall. Bear markets are generally good times to buy because demand declines significantly.
Moore’s Law and the future of ASICs
“Moore’s Law: an axiom of microprocessor development that generally holds that processing power doubles approximately every 18 months, especially relative to cost or size.” —Merriam Webster
We are coming to the end of the computer chip revolution as chipmakers push the limits of physics. This is by no means the end of massive increases in Bitcoin’s hash rate for the network. The mining industry is very rough around the edges with respect to very basic principles such as heat dissipation, software implementations and relationships with energy producers. Chips may have slower leaps in terms of increases in computing power, but we’ve barely scratched the surface in terms of other technological leaps forward that will ultimately lead to more power being consumed and more computing power being used to secure the Bitcoin network.
As bitcoin becomes more widespread, and its value is understood, the demand for mining will inevitably increase globally. The result will naturally be an increase in the Network hash rate. As a miner this is a painful reality as it means the profitability of my hardware will decrease over time. As a Bitcoiner, it gives me confidence in the monetary network I use daily.
This is a guest post by Kaboomrack’s Alex. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.
