Bitcoin’s Network Charted: understanding miner trends

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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.

Bitcoin's Network Hash Rate vs BTC Price in USD over the past four years.
Daily hash rate and BTC price over four years. Raw data from Bit Info Charts.

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.

Simplified Stock and Flow System Dynamics Diagram of Bitcoin Mining. Miner earnings vs. bitcoin price vs. difficulty adjustment vs. hash rate size.
Stock and flow model of Bitcoin mining. Every 2016 blocks (~ two weeks) difficulty adjusts to sync blocks to the target pace. Miner earnings are affected by BTC price and difficulty adjustments, which may trigger hash rate changes.

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.

Causal Loop Diagram of Bitcoin's Price versus miner earnings and hash rate size.
BTC price goes up -> miner earnings go up -> hash rate goes up -> difficulty increases -> earnings go down. BTC price goes down -> earnings go down -> hash rate goes down -> difficulty goes down -> miners earn more. The red ´=´ lines represent the lag of hash rate change.

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.

Monthly Rate of change fo miner profits vs Bitcoin's network size over four years. Some resemblance to Voltari Predator-Prey models.
Hash rate vs. miner profit changes may resemble the Voltari Predator-Prey model, but not always due to exogenous factors.

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.

Bitcoin mining interest spikes when BTC prices are high. Google Trends vs. miner profitability over time.
Monthly averages. Data from Miner Daily, Bit Info Charts, and Google Trends.

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.

Bitcoin mining ASICs follow the BTC price.
Data from Miner Daily and Bit Info Charts. Four monthly averages, eight months apart. ASIC prices based on popular models which are in stock from resellers.

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.

Miner rewards follow the BTC price but are diminishing over time due to halvings.

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 DistributionTimestampBlock NumberBlock RewardMinted CoinsTotal Bitcoins
Mining Start2009-01-03050 BTC10,500,00010,500,000
1st Halving2012-11-28210,00025 BTC5,250,00015,750,000
2nd Halving2016-07-09420,00012.5 BTC2,625,00018,375,000
3rd Halving2020-05-11630,0006.25 BTC1,312,50019,687,500
4th HalvingExpected 2024740,0003.125 BTC656,25020,343,750
5th HalvingExpected 2028850,0001.5625 BTC328,12520,671,875
Halvings continue until Total Bitcoins reach 21 million.

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.

Bitcoin's Network vs Miner Profit over one year. Hash rate dropped due to low profits, halving, and miner migration during the start and end of the wet season in China.

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

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