This is the opinion editor of Alex, a bitcoin miner with Kaboomracks.
For those new to Bitcoin mining, it is important to understand the importance of Bitcoin difficulty regulation and its impact on mining profitability. Most newcomers to bitcoin mining will consult their ASIC profitability in their mining calculator and expect that profitability to remain relatively the same in the future. This is a misunderstanding, like the profitability of any machine, it tends to decline over time. The 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 used, the less important it becomes, as newer software requires more computing power. If you used an iPhone from 6 years ago, its performance would be incredibly disappointing. The older the phone, the less useful it is.
A very similar process occurs in mining. When you’re mining, you’re competing with all the other miners in the world. As more miners launch machines, it becomes harder to compete. Having newer and more efficient hardware makes you more competitive, but that hardware is rapidly becoming less competitive.
Bitcoin Difficulty Adjustment
Bitcoin difficulty regulation is something built into the Bitcoin protocol to ensure that Bitcoin has a stable and predictable supply schedule. If there was no difficulty regulation, it is likely that all bitcoins would have already been mined and miners would have no incentive to secure the network. As more miners join the network, blocks are minted faster as the hash rate increases. The network responds by adjusting the difficulty higher to ensure that blocks arrive in about 10 minutes. For miners, increased difficulty adjustments mean less profit. For the average Bitcoin user, this means more security for the monetary network they use.
Image courtesy of insights.braiins.com
Downward difficulty adjustments mean that miners will earn more because they are the result of the hash rate being offline. A famous example of this is when China banned Bitcoin mining and a large part of the network hash rate was offline for a while. Downward difficulty adjustments are not the norm because mining rigs are always getting more powerful and efficient. Even with machine efficiency stagnating and hashrate increasing, more machines would be produced and connected. The Bitcoin mining industry is incredibly immature and has a lot of room for improvement, which means that the hash rate is almost a must. will increase rapidly in the long run.
We’re currently seeing a bull market in energy prices with a suppressed bitcoin price, which means miners are experiencing quite a bit of pain. Since the hash rate is offline, it is possible that there may be some downward difficulty adjustments, but this is not something that miners should put into their models. It is important to prepare for the worst case scenario we have seen in the last few months.
New Cars on the Market
Every two years, ASIC manufacturers release a new machine with significant improvements in hash rate and efficiency. The recent network hash rate increases are largely due to seeing the deployment of Bitmain’s S19 XP and S19 Hydro. Another factor is that as a result of the infrastructure build-up, a large number of older generation machines are finally being put into operation.
This diagram is an oversimplification for visual purposes only.
When you buy an ASIC, its value will constantly decrease both as the network hash rate increases and as new machines come to market. The value will vary depending on the price of Bitcoin, but it’s safe to say that the machine loses value over time. Therefore, it is extremely important that the machine works when you have it. Buying it to connect later is a waste of money.
Bitcoin Buying 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 profitable. Done wrong, this is a fantastic way to get poor quick. The income generated by the machine is fairly consistent, but the purchasing power of that income varies greatly. Electricity prices may be fixed in dollars, but when priced against the income you get from this machine, it’s very volatile. The S19j Pro can generate 38,000-40,000 sats per day, but if you are earning $0.10/kWh, your energy costs will be 41,263 sats with bitcoin trading at $17,461.
That’s why it’s so important to try and get the lowest possible electricity prices for your equipment to be profitable and ROI. Finding cheap electricity is neither simple nor easy. There are often hidden fees or difficulties that cause miners to fail. All miners, no matter how big or small, are subject to the economics of changing purchasing power, network hash rate increases, and machine devaluation/obsolescence.
ASIC Assessment
There are major costs for manufacturers to produce new equipment. We are currently at or nearing that floor for new equipment from the manufacturer. As a result, they either slow down or stop the production of certain models. Individuals choose to pay a premium for new equipment because they come with a warranty. On the other hand, used equipment is generally not covered by a warranty, as well as the uncertainty of the conditions under which it operates. For this reason, used equipment is often sold at a significant discount.
ASIC prices are volatile like every industry. Supply and demand are the main factors that determine the price. There are a million different reasons why people who buy ASICs might want to buy one at a given time, but Bitcoin price and difficulty are the main influences. If the income generated by ASIC has a lower purchasing power, there will be less demand and the price of ASIC will fall. Bear markets are generally good times to buy because demand decreases significantly.
Moore’s Law and the Future of ASICs
“Moore’s Law: an axiom of microprocessor development that typically holds that processing power doubles every 18 months, especially relative to price or size.” – Merriam Webster
We’re nearing the end of the computer chip revolution as chipmakers push the boundaries of physics. This is by no means the end of the massive increases in Bitcoin’s network hash rate. The mining industry is very crude about very basic principles such as heat dissipation, software implementation and relationships with energy producers. Computer chips may have slower leaps with increasing computing power, but we’ve barely scratched the surface of other technological leaps that will ultimately require more energy and more computing power to secure the Bitcoin Network.
As Bitcoin becomes more widely accepted and its value understood, the demand for mining is bound to increase globally. The result will naturally be an increase in the Network hash rate. As a miner, this is a painful reality because it means my hardware’s profitability will decrease over time. As a Bitcoiner, this gives me confidence in the money network I use on a daily basis.
This is a guest post by Kaboomracks Alex. The opinions expressed are entirely their own and not those of BTC Inc. or do not reflect the views of Bitcoin Magazine.