This is an opinion editorial from Alex, a bitcoin miner with Kaboomracks.
It is important that people looking at bitcoin mining for the first time understand the importance of Bitcoin difficulty adjustment, as well as the impact this has on mining profitability. Many newcomers to bitcoin mining will look up the profitability of an ASIC in a mining calculator, expecting that profitability to stay relatively the same in the future. This is a misunderstanding as the profitability of any given machine tends to decline over time. Difficulty increases should be understood before purchasing an ASIC.
An easy way to understand this is to compare an ASIC to any other electronic device. The longer the device is in use, the less relevant it becomes, as new software requires more computing power. If you were to use an iPhone from 6 years ago, its performance would be incredibly frustrating. The older the phone gets, the less useful it is.
A very similar process occurs in mining. When you are mining, you are competing with all the other miners in the world. As more miners turn on the machines, it becomes more difficult to compete. Having newer, more efficient hardware makes you more competitive, but that hardware is quickly 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. If there was no difficulty adjustment, it is likely that all of the bitcoin would have already been mined and there would be little to no incentive for miners to secure the network. When more miners join the network, blocks are minted at a faster rate as a result of an increase in hash rate. The network responds by setting the difficulty higher to ensure that the blocks arrive in around 10 minutes. For miners, increasing difficulty settings means less profit. For the average Bitcoin user, it means more security for the monetary network he is using.
Downward difficulty adjustments mean that miners will make more profit, as these are the result of hash rate disconnection. The famous example of this happening is when China banned Bitcoin mining and a large part of the network hash rate went offline for a period of time. Downward difficulty adjustments are not the norm, as mining hardware always gets more powerful and efficient. Even if there were a stagnation of machine efficiency and increases in hash rate, more machines would be produced and connected. It is going to increase at a rapid rate in the long-term future.
We are currently seeing a bull market in energy prices with a suppressed bitcoin price, which means miners are experiencing quite a bit of pain. There is a possibility that there will be a number of downward difficulty adjustments as the hash rate goes offline, but this is not something miners should include in their models. It is important to prepare for the worst case scenario, which is what we have seen in recent months.
New machines coming to the market
Every two years, ASIC manufacturers release a new machine with significant improvements in hash rate and efficiency. The recent increases in the network hash rate are largely due to Bitmain’s implementation of S19 XP and S19 Hydro. Another factor is that a large number of older generation machines are finally coming on as a result of infrastructure construction.
When you buy an ASIC, its value will constantly depreciate as the network hash rate increases and new machines enter the market. The value will fluctuate based on the price of Bitcoin, but it is safe to say that the machine loses value over time. That’s why it’s incredibly important to have the machine running when you have it. Buying it to plug in later means you’re wasting money unnecessarily.
Bitcoin purchasing power
Bitcoin mining is like taking a long Bitcoin position, but with a lot of headaches and execution risk. If done correctly, it can be incredibly lucrative. Done incorrectly, it’s a fantastic way to get poorer quickly. The income generated by the machine is fairly constant, but the purchasing power of that income varies wildly. Energy prices may have a stable price in dollars, but they are highly volatile when priced based on the revenue you get from that machine. An S19j Pro can generate between 38,000 and 40,000 sats a day in revenue, but if you extract $0.10 per kWh your energy costs will be 41,263 sats with bitcoin trading at $17,461.
This is why it is incredibly important to try to get the lowest electricity prices possible in order to be profitable and get a return on investment in your equipment. Finding cheap electricity is not simple or easy. Often there are hidden fees or complications that cause miners to fail. All miners, regardless of how big or small, are subject to this economy of variable purchasing power, network hash rate increases, and machine devaluation/obsolescence.
There is a base cost for manufacturers to produce new equipment. We are currently on or reaching that floor for new equipment coming from the manufacturer. As a result, they are slowing down or stopping production of certain models. People choose to pay a premium for new equipment because it comes with warranties. Used equipment, on the other hand, usually does not come with a warranty, and also with the uncertainty of the condition in which it was run. For this reason, used equipment often sells for a substantial discount.
ASIC pricing is variable like any other industry. Supply and demand are the main factors that determine the price. People who buy ASICs have a million different reasons why they might want to buy at any given time, but Bitcoin’s price and difficulty are major influences. If the purchasing power of the income earned by an ASIC is low, there will be less demand and the price of the ASIC will fall. Bear markets are generally good times to buy because demand drops significantly.
Moore’s Law and the future of ASICs
“Moore’s Law: An axiom of microprocessor development that generally holds that processing power doubles roughly every 18 months, especially relative to cost or size.” — Merriam Webster
We are nearing the end of the computer chip revolution as chipmakers are pushing the boundaries of physics. By no means is this the end of the massive increases in the hash rate of the Bitcoin network. The mining industry is very crude when it comes to very basic principles, such as heat dissipation, software implementations, and relationships with power producers. Computer chips may have slower leaps in terms of increases in computing power, but we have barely scratched the surface of other technological advances that will ultimately lead to more energy being consumed and computing power expended for secure the Bitcoin network.
As bitcoin becomes more widely adopted and its value is understood, the demand for mining will increase globally. The result will naturally be an increase in the hash rate of the network. As a miner, this is a painful reality, as it means that the profitability of my hardware will decrease over time. As a Bitcoiner, it gives me confidence in the monetary network that I use on a daily basis.
This is a guest post by Kaboomracks Alex. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.