The Difficulty of Mining

Bitcoin mining is at its lowest profitability level of 2018

By Lewis Wickes Hine (1874-1940) [Public domain], via Wikimedia Commons

Considering the recent drop in Bitcoin price, this is not surprising.

From https://blockchain.info/charts/miners-revenue

It's been a tough year for miners, as the chart above bears testament to. Profitability has continued to decrease substantially, it's now only approximately 20% of what it was at its peak in December 2017! Because mining difficulty generally increases, the drop in mining revenue has outpaced the drop in the price of Bitcoin itself (which is now worth approximately 1/3 of what it was at its December peak).

What is surprising to me is how mining continues to grow. Despite constantly reduced profitability and even acknowledging small advances in mining technology and efficiency, the constant increase in hash rate is surprising. Dips in price do affect hash rate (look at the effect of the dip yesterday and today in the chart below), but the general trend remains very positive.

From https://blockchain.info/charts/hash-rate

In fact; the last difficulty adjustment (the self-adjustment to the BTC blockchain carried out to compensate for changes in hash rate - BTC tries to maintain a block time of 10 minutes) on 5 June was a 14.71% increase. That's the third largest difficulty increase this year!

From https://bitcoinwisdom.com/bitcoin/difficulty

So despite BTC price dropping since December, the mining hash rate has still been doing this:

From https://blockchain.info/charts/hash-rate

Though you wouldn't expect it in such bearish times, that's exactly what it has done. The charts don't lie.

With so much hash rate available and so few transactions (the poor market prices mean that trading volume is very low), the mempool (the pool of unprocessed BTC transactions waiting to be mined on the blockchain) looks more like a mempuddle.

From https://blockchain.info/charts/mempool-size

Oh well, at least an empty mempool makes for cheap BTC transactions!

From https://blockchain.info/charts/mempool-state-by-fee-level

Priority BTC transactions from only 18 satoshis per byte, now that I can live with!

Analysis

If hash rate is climbing like this during such unprofitable times, just imagine what it will do in a bull market! The apparent disregard for dropping prices means that more and more people are entering the BTC mining market looking for a piece of the BTC mining pie. This is good for BTC exposure and adoption in general. It's also good for BTC decentralisation.

Conversely, it's also just as feasible that it is the current BTC miners who are increasing their own hash power to stay ahead. This would be a good strategy on their part because:

• Reduced profits would push the small miners out, thereby further increasing the share of rewards going to the big miners.
• Electricity costs factor into BTC mining, those who are less power efficient suffer more when profits are low. Eventually they will have to shut down too (although they could restart later).

Large miners could therefore take a knock now, in exchange for increased future rewards. This is bad for BTC in general as it further centralises BTC mining.

I do not know which of these two scenarios is more likely, the realistic assumption is that it is a combination of both.

It is also worth remembering that BTC mining has a knock on effect. If BTC turns unprofitable, miners can switch to other SHA-256 algorithm coins relatively easily. Whichever coin is most profitable at the time may see sudden jumps in hash rate as BTC miners seek to temporarily maximise profits elsewhere. It depends on what sort of investment strategy the miners favour.

Closing notes

While looking at mining graphs I noticed something I have not noticed before: transaction rates on BTC are highest at about 1600 - 1700 UTC and lowest at about 0400 - 0500 UTC. If you want to get the fastest and cheapest BTC transactions - aim for as close to that 0400 - 0500 UTC time bracket as you can.

Top Tip:

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Cheers, I'm off to see if I have anything to trade for CargoX!

Yours in crypto,
Bit Brain

DISCLAIMER:
I am neither a financial advisor nor a professional trader/investor. This is not financial advice, investment advice or trading advice. Unless otherwise stated, all my posts are my opinion and nothing more. Crypto is highly volatile and you can easily lose everything in crypto. You invest at your own risk! Information I post may be erroneous or construed as being misleading. I will not be held responsible for anything which is incorrect, missing, out-of-date or fabricated. Any information you use is done so at your own risk. Always Do Your Own Research (DYOR) and realise that you and you alone are responsible for your crypto portfolio and whatever happens to it.