This is an editorial by Kaboomracks Bitcoin miner Alex.
For individuals considering bitcoin mining for the first time, it is important to understand the importance of bitcoin difficulty adjustment and the impact this has on mining profitability. Many newcomers to Bitcoin mining look at the profitability of his ASIC on a mining calculator and expect that profitability to remain relatively the same in the future. This is a misconception as the profitability of certain machines tends to decline over time. Before you buy an ASIC, you should understand the added difficulty.
An easy way to understand this is to compare ASICs to other electronic devices. New software requires more computing power, so the longer a device is used, the less relevant it becomes. If you had a six-year-old iPhone, its performance would be incredibly frustrating.The older the phone, the less useful it becomes.
A very similar process occurs in mining. When you are mining, you are competing with all other miners around the world. The more miners turn on the machine, the harder it is to compete. Using newer, more efficient hardware makes you more competitive, but that hardware is rapidly becoming less competitive.
Bitcoin difficulty adjustment
Bitcoin difficulty adjustment is built into the Bitcoin protocol to ensure that Bitcoin has a stable and predictable supply schedule. Without difficulty adjustments, all bitcoins would likely already be mined, and there would be little to no incentive for miners to secure the network. As more miners join the network, blocks are created at a faster rate as the hash rate increases. The network responds by adjusting the difficulty so that blocks arrive in about 10 minutes. For miners, increasing difficulty adjustments mean decreasing profits. For the average Bitcoin user, this means increased security for the currency network they are using.
Photo from Insights.brains.com
Lower difficulty adjustment means miners get more profit. This is the result of the hashrate going offline. A famous example of this event was when China banned Bitcoin mining and the majority of network hashrates went offline for a period of time. Mining hardware is constantly getting more powerful and efficient, so tweaking to reduce difficulty is not common. Even as machine efficiency stagnates and hash rates rise, more machines will be produced and plugged in. It will increase rapidly in the long term.
We are currently seeing a bull market in energy prices with bitcoin prices subdued. This means that miners are going through a lot of pain. As the hash rate goes offline, there can be a series of downward adjustments, which miners should not factor into their models. It’s important to prepare for the worst-case scenario we’ve seen in the last few months.
A new machine hits the market
Every few years, ASIC manufacturers release new machines with vastly improved hash rates and efficiency. The recent rise in network hashrate is largely due to the deployment of Bitmain’s S19 XP and S19 Hydro. Another factor is the large number of older generation machines that end up being turned on as a result of the infrastructure being built.
This chart is simplified for visual purposes only.
Buying an ASIC increases the network hash rate, and its value is constantly declining as new machines come to market. Its value fluctuates according to the price of Bitcoin, but it is safe to say that machines lose their value over time. . Buying to plug in later means you’re throwing money away unnecessarily.
Bitcoin purchasing power
Mining Bitcoin is like taking a long position in Bitcoin, but with a lot of headaches and execution risks. If done well, it can be incredibly profitable. It’s a great way to get poor very quickly if you do it the wrong way. The income generated by machines is fairly constant, but the purchasing power of that income varies greatly. The price of electricity may be stable in dollars, but it becomes very volatile when you price it by the income you make from that machine. The S19j Pro could earn an income of 38,000-40,000 Sats per day, but if you are mining at $0.10 per kWh, your electricity costs will be 41,263 Sats and Bitcoin transactions will be $17,461.
This is why it is so important to get the lowest possible electricity bills to increase the profitability and ROI of your equipment. Finding cheap electricity is neither easy nor easy. There are often hidden fees and complications that cause miners to fail. All miners, large or small, are subject to these economics: fluctuating purchasing power, rising network hashrate, and declining/deprecating machines.
ASIC price
There is a base cost for the manufacturer to produce new equipment. We are now reaching or reaching the floor for new equipment from manufacturers. As a result, they are slowing down or stopping production of certain models. Individuals choose to pay a premium for new equipment because it comes with a warranty. Second-hand equipment, on the other hand, generally does not come with a warranty or the uncertainty of its used condition. Because of this, used equipment is often sold at deep discounts.
ASIC pricing fluctuates like every other industry. Supply and demand are the main factors that determine price. An individual buying an ASIC has a million reasons why he might want to buy at any given time, but the price and difficulty of Bitcoin have a big impact. If the purchasing power of the income generated by ASICs is low, there will be less demand and the price of ASICs will fall. A bear market is generally a good time to buy as demand drops significantly.
Moore’s Law and the Future of ASICs
“Moore’s Law: An axiom of microprocessor development, processing power typically doubles approximately every 18 months, particularly proportional to cost and size.” — Merriam Webster
The computer chip revolution is coming to an end as chip makers push the boundaries of physics. This is not the end of the massive increase in Bitcoin’s network hash rate. Mining is very rough around very basic principles such as heat dissipation, software implementations, and relationships with energy producers. Computer chips may make slow leaps when it comes to increasing computing power, but they will eventually consume more power and consume more computing power to protect the Bitcoin network. We’ve only scratched the surface as to the other technological leaps that could lead to this.
There is no doubt that the demand for mining will increase globally as Bitcoin becomes more widely adopted and its value understood. The result, of course, is a higher network hash rate. As a miner, this is a painful reality as it means my hardware will become less profitable over time. As a Bitcoiner, it gives me confidence in the currency network I use every day.
This is a guest post by Kaboomracks Alex. Opinions expressed are entirely his own and do not necessarily reflect those of his BTC Inc. or Bitcoin Magazine.
