Bitcoin mine on the edge of the Tibetan Plateau near Sichuan, China. The mine is strategically located next to a hydraulic power generator.
It just got a lot easier and more profitable to mine for Bitcoin.
The world has known for months that more than half of the world’s bitcoin miners would go dark if China cracked down on mining. Now that it has happened, the Bitcoin algorithm has adjusted accordingly to ensure miners’ productivity doesn’t drop any further from a cliff.
This adjustment – which went into effect early Saturday morning – also means more money will be available to the bitcoin miners who stay online.
“This will be a source of income for miners,” said bitcoin mining engineer Brandon Arvanaghi.
“They suddenly have a significantly larger piece of the pie, which means they are 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. The solution to this puzzle completes a block, a process that both creates new bitcoins and updates the digital ledger to keep track of all bitcoin transactions.
China has long been the epicenter of bitcoin miners, with previous estimates suggesting 65 to 75% of the world’s bitcoin mining took place there, but government-led crackdown has effectively banned the country’s crypto miners.
“For the first time in the history of the Bitcoin network, we have completely stopped 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 worldwide – has fallen off the network since its market high in May.
Fewer people mining means fewer blocks are being solved every day. It usually takes around 10 minutes to complete a block, but Feinstein told CNBC that the Bitcoin network has slowed to 14 to 19-minute block times.
Precisely for this reason, Bitcoin recalibrates and resets every 2016 blocks or roughly every two weeks about how difficult it is for miners to mine. On Saturday, the Bitcoin code automatically made mining easier by about 28% – a historically unprecedented decline for the network – and thus set the block times back to the optimal 10-minute window.
According to Mike Colyer, CEO of digital currency company Foundry, the Bitcoin algorithm is programmed to deal with an increase or decrease in mining machines. “It’s a self-regulating market that doesn’t need an outside committee to determine what to do. This is a very strong concept, ”he said.
Fewer competitors and fewer difficulties mean that any miner with a machine connected will see a significant increase in profitability and more predictable revenue.
“All bitcoin miners have the same economics and mine on the same network, so both public and private miners will see revenue growth,” said Kevin Zhang, former chief mining officer at Greenridge Generation, the first major US power plant to begin with mining on a grand scale behind the counter.
Assuming a fixed cost of electricity, Zhang estimates sales of $ 29 per day for those using the latest generation Bitmain miner, up from $ 22 per day before the change. Longer-term, although mining income can fluctuate with the price of the coin, Zhang also noted that mining revenues were only 17% lower from the Bitcoin price high in April, while the price of the coin was down about 50%.
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“We anticipate a time of much higher mining profitability for Compass Mining customers,” said Whit Gibbs, CEO and founder of Compass, a bitcoin mining service provider. “We assume miners are about 35% more profitable.”
Blockcap’s Feinstein agrees. “We expect an increase in sales and profits for the foreseeable future. This was an unexpected gift to the network, not only in terms of revenue, but also in terms of decentralization and sustainable energy metrics.”
Although the difficulty reduction benefits all miners, those who use new generation equipment benefit the most.
Feinstein tells CNBC that most of the devices in China that got shut down were old generation devices that are inefficient and run on much lower profit margins.
Six month increase
It is difficult to predict how long the hashrate deficit will last. Barbour said it was entirely possible that Beijing could simply reverse its policies and this could only be a short-term hiatus.
If not, most mining crypto experts agree that it will take anywhere from six to 15 months for all of the idle and displaced mining hardware to migrate. “It will be a long time before the surplus finds a home,” said Barbour.
Gibbs believes the miners should generate higher revenues for at least the remainder of 2021.
“Every day, the Chinese miners around the world look for places where they can turn their machines on again. Space is very limited right now, ”said Colyer.
Part of the problem, according to Feinstein, is that even before mining stopped in China, there was a lack of infrastructure to accommodate the new-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 can absorb the influx of equipment.
“Some mining companies built everything and were just waiting for these ASICs to plug in, which would only take a few days,” explained Arvanaghi.
“Others may need to build containers, expand warehouses, or increase their electricity capacity. We won’t see the hash rate hit what it used to be overnight, but we’ll see it rise again over the next few months, ”he continued.
Of all the possible destinations for this gear, the U.S. appears particularly well positioned to absorb this stray hashrate. CNBC is told that major U.S. mining operators are already signing contracts to patrol some of these homeless Bitmain miners.
Bitcoin mining in the US is booming and venture capital is flowing so they are ready to take advantage of miner migration, Arvanaghi told CNBC.
“Many US bitcoin miners who were funded when the price of bitcoin began to rise in November and December 2020 meant they were expanding their power capacity when the Chinese mining ban went into effect,” he said. “It’s great timing.”
However, Barbour believes that much smaller players in the US residential areas also have a chance to catch these surplus miners.
“I think this is a signal that bitcoin mining will inevitably be more distributed in the future,” said Barbour. “Fewer mega mines like the 100 megawatts we see in Texas and more small mines in small commercial and ultimately residential areas. It’s much more difficult for a politician to close a mine in a garage. “