Bitcoin is not comparable to traditional markets. Therefore financial analyses and statistical tools do not accurately describe the state of Bitcoin’s network. In particular the nonlinear dynamics of Bitcoin’s hash rate size, block reward, difficulty adjustment, and coin value make miner profitability hard to predict long-term.
Here we hope to gain insight from visualizations of the system as well as network and hardware trends.
Hash Rate Follows Price
Hash rate is the pulse of Bitcoin’s network. In the short-term mining capacity expands and contracts alongside miner earnings. Earnings rely heavily but not solely on bitcoin’s price.
In the long-term the price of a bitcoin continues to rise which encourages entrants to the network. Newly manufactured ASICs are coming online at a quicker pace than the die-off rate of older generation machines. Since their induction in 2013, bitcoin mining machines have also become more efficient and hash more per unit. Combined these factors lead to a larger network size over time and ever-increasing difficulty adjustments. However, machine and energy availability, cyclical bear markets, reward halvings, and difficulty adjustments hinder exponential network growth.
Difficulty Adjustments
As hash rate grows and shrinks the difficulty adjusts through a first order system. Every two weeks Bitcoin’s mining difficulty self regulates by comparing the current block discovery rate to the target pace of 2016 blocks, or one block every 10 minutes. When the difficulty increases it becomes harder for miners to find blocks and the pace slows. Likewise, if difficulty decreases block discovery quickens.
Sometimes difficulty changes affect miner earnings, which in turn may affect Bitcoin’s network size. Older generation machines are more sensitive to Bitcoin’s difficulty mechanism than newer models because they consume more electricity per TH. In other words, it costs more to mine a bitcoin with an older machine.
Bitcoin’s value in USD also affects miner profits. When earnings go up due to a BTC price rise more miners join the network and the hash rate climbs. Eventually, either the BTC price will drop or difficulty will increase to the point where profits fall and miners leave the network. But as the hash rate contracts the remaining miners then earn more per share.
It can be said that hash rate chases mining profitability, however this is not an exact science. Below you can observe the rate of change of the average monthly hash rate compared to miner profits. In some instances a hash rate change (blue) lags behind a profit change (orange), but not always.
Right now miner earnings are high enough for less efficient machines to retain a good profit margin. Thus ASICs are not leaving Bitcoin’s network when earnings decrease slightly. Also, hash rate growth is hindered by exogenous factors like micro chip shortages, energy availability, etc.
Mining Interest
As expected, spikes in the frequency of “bitcoin mining” google searches correspond with the 2018 and 2020 BTC price runs. Individuals and companies take notice when miner earnings are good, shown below.
Yet, inexperienced, risky, or unlucky miners can be caught out post bull-run. When the BTC price is high miners may spend too much on over-priced or inefficient hardware, or secure poor hosting or electricity deals. Miners may also purchase machine futures with no guarantee that high earnings sustain until rigs arrive. If the BTC price drops significantly or energy prices rise a miner’s ROI period becomes extended. In some cases this leads to bankruptcy.
Although this bull run seems different. Larger volumes of institutional players in China and the US have gained traction through financing, fundraising, and company share listings. Institutional miners are stacking exahashes as well as sats in the hope of hedging against a crypto market swing or financial downturn. Regardless, if as predicted the price of bitcoin rises to six-figures before entering the next bear cycle, the majority of mining operations should remain profitable.
ASIC Price Hikes
When Bitcoin’s price and miner profitability go up the value of a bitcoin mining machine follows suit. This is because machines are priced in dollars and not in BTC. In fact to our knowledge only one top manufacturer, Bitmain, accepts BTC payments for hardware, and nearly all ASIC resellers prefer fiat.
Last year miners could score a new generation rig for an average of $25 USD per terahash. Now prices have quadrupled and are over $100/TH. Manufacturers have over a year of backlog. Therefore seasoned miners prefer to stack machines in bear markets when mining interest is low and machines are less valuable. But this can be challenging because both the earnings per TH and a miner’s hodled sats diminish in value in a bear market, which gives the miner less purchasing power.
As BTC climbs and the microprocessor chip shortage persists resellers continue to demand higher prices for machines. This is seen above by the slight decoupling of the price per TH (blue line) from miner profits (green line). An Antminer S-19 Pro 110 TH was $3,400 a year ago and is $14,500 today. However, the value of an ASIC has shifted from 40% of one bitcoin to just 20% today. This is demonstrated by the grey columns above.
Note: Many resellers base hardware prices on earnings per terahash whereby the return of investment period is around one year. In other words the sales price of an ASIC is approximately the same as its yearly net earnings at the time of purchase. Net yearly earnings are = machine TH x earnings per TH x 365 days. Earnings/TH can be found on mining pool sites.
Diminishing Miner Rewards
Bitcoin’s value is driven upwards by coin scarcity at the same time as miner rewards are decaying exponentially over time.
Block rewards are the distribution of new coins and are awarded to miners who find blocks. Rewards halve every four years, or 210,000 blocks. Issuance stops when the total supply of bitcoins reaches 21 million around the year 2140. Then miners will receive compensation through transaction fees only. See below.
| Reward Distribution | Timestamp | Block Number | Block Reward | Minted Coins | Total Bitcoins |
|---|---|---|---|---|---|
| Mining Start | 2009-01-03 | 0 | 50 BTC | 10,500,000 | 10,500,000 |
| 1st Halving | 2012-11-28 | 210,000 | 25 BTC | 5,250,000 | 15,750,000 |
| 2nd Halving | 2016-07-09 | 420,000 | 12.5 BTC | 2,625,000 | 18,375,000 |
| 3rd Halving | 2020-05-11 | 630,000 | 6.25 BTC | 1,312,500 | 19,687,500 |
| 4th Halving | Expected 2024 | 740,000 | 3.125 BTC | 656,250 | 20,343,750 |
| 5th Halving | Expected 2028 | 850,000 | 1.5625 BTC | 328,125 | 20,671,875 |
Hash Rate Drops
The last halving was in May of 2020. At the time Bitcoin was in the midst of a bear cycle and miner profitability immediately dropped from ~ 12¢ to 6¢ per TH. The hash rate contracted as many miners turned off older generation machines which were operating near breakeven limits.
Despite low earnings Bitcoin’s network picked up again during the 2020 wet season. Some less efficient ASICs continued mining at reduced electricity prices in Sichuan and Yunnan. But by October 2020 most remaining older generation rigs went offline … only to return to the network again when profits shot up in January 2021.
Force Majeure
Drops in Bitcoin’s network size are not only attributed to profitability decreases, but political and environmental issues as well. For example, both the Texas power outage and bitcoin mining ban in Inner Mongolia caused temporary drops of hash rate in February 2021 and in March 2021 respectively. And in April 2020, hash rate dropped between 30% to 50%, depending on the source, due to temporary mine shutdowns in western China.
Final Thoughts on Hash Rate
In the short-term hash rate will continue to grow because bitcoin mining interest remains high and financing encourages larger-scale operations. By the end of the year the hash rate is expected to reach up to 240 EH/s. As a result Bitcoin’s difficulty, currently at 23 trillion, may surpass 30 trillion. Yet the Corona pandemic and ASIC manufacturing bottlenecks continue to limit network expansion this bull run.
In the long-term we can expect Bitcoin’s network growth to sedate for the following reasons:
- the price of bitcoin will not grow indefinitely
- miners earn less per block reward over time
- difficulty increases alongside network growth
- miners earn smaller shares as more join the network
- the availability of energy cannot grow indefinitely
- electricity tariffs increase over time
