This chart shows the logic connections for those important parameters that help you understand the BTC mining ecosystem.
A miner has its own gross margin, it equals to the revenue per Th/s minus direct cost per Th/s. Revenue is the BTC Qty mined per Th/s at the market sold price and the direct cost is the energy cost per Th/s. Typically, we use 1 Th/s (one Trillion hash per second) as the Unit; Miner’s cost per 1Th/s is hardly changed in a short period because their energy and mining machine is hardly changed. Unless the unit energy cost changed. However, the revenue per Th/s is very volatile. So, in most case, revenue per Th/s controls miner’s gross margin and drive miner’s behavior of open and close mining machines.
Revenue per Th/s is determined by the Price of BTC and the Qty of BTC mined per Th/s (QTh/s ).
QTh/s = BTC Reward per Block/ Network Difficulty = 12.5/Difficulty (D),
D is the difficulty which is the BTC network required total harsh needed to produce one block. Therefore, QTh/s is determined by the difficulty of the BTC network and the reward per block. As the reward per block only changed every four years. The QTh/s most time is determined by the difficulty.
- Difficulty = total network Th/s (Hashrate) *block time (Bt).
- Block time is the total seconds needed to produce one block. So, network Difficulty is determined by network Hash rate with a positive impact.
- Therefore, QTH/S *Hash rate * Bt = 12.5. However, the difficulty is locked at a certain level for around 2 weeks and cannot be adjusted immediately.
- The BTC hashrate eventually determined QTh/s negatively, with a 2 weeks delay. The higher the hashrate, the more difficult to mine BTC and the less QTh/s Ves Versa.
Price change of BTC will immediately impact Miners’ Revenue per Th/s . Also because the cost of Th/s will not change in a short period. The gross margin of miners will positively follow the change of the price. From another side, the Qty of BTC mined per Th/s will also impact the Miner’s revenue per Th/s . But the difference is it will lag behind around 2 weeks.
When the difficulty stays stable, the price of BTC is the major driver of the BTC Hashrate change. The price goes up, the BTC hashrate goes up, vice versa. When difficulty adjusted significantly, it becomes the major driver for BTC hashrate change. This is because, when difficulty reduced, the Qty mined per Th/s will be increased, therefore, the Revenue pr Th/s will be increased then increase the gross margin. In this situation, those less energy efficiency mining machines become gross margin positive. Miners will restart those machines and drive up the BTC hashrate.
This is the reason why Bitcoin’s hash rate and value have historically exhibited a very close relationship with a 0.77 correlation. When the adjustment of difficulty happens, this correlation will break. This is why you see the recently increased hashrate has not been correlated with a substantial rise in the price of BTC.
(i) Following a drop in Bitcoin’s (BTC) network hash rate back on March 26, it now appears as though the premier currency’s hashrate has increased by a whopping 33% over the last two days or so. Could you please comment on why you think this has been the case? Why did these successive events (i.e. fall and rise in hashrate) occur in your opinion?
(ii) In line with the aforementioned question, this latest increase hashrate has not been followed by a substantial rise in the price of BTC? Why do you think this has happened -- especially since Bitcoin’s hash rate and value have historically exhibited a very close relationship, with a 0.77 correlation?
Now you know that, the recent hashrate's rapid increase is majorly due to the difficulty reduction on March 26th, which is because of the BTC price drop dramatically starting 2 weeks before March 26th.
Let us discover what has happened for the past month.
Phase 1: from End of February to March 9th, 2019
- The total hashrate of BTC increased by 20% from the end of February to March 8th. This is major because the mining machine delivery was delayed by around 2-3 weeks after the Chinese New Year due to the COVID-19.
- The mining farms in China started to come back from holiday and reopen as well. The increased BTC hashrate brought sell-side pressure for BTC as the total energy cost of BTC network went up and more BTC needs to be sold on the market to cover the cost of electricity and other operations.
Phase 2 from March 8th to March 25th
- From March 8th the global financial market started to crumble due to the impact of COVID-19 and the catalyst of the Crude Oil War between Saudi Arabia and Russia.
- All of the prices of the financial assets start to fall. These combined factors caused BTC Price to drop dramatically starting from March 8th, 2020. Within the next 2 days, the price of BTC decreased from the 9,000$ level to the 5,000$ level. This reduced miners’ revenue by 30%-35%.
- At the same time, there was a BTC difficulty adjustment on March 9th by increasing 6%, which means the Qty per Th/s BTC mined decreased by 6%.
With the combined impact of both BTC price and Qty per Th/s , the revenue as shown in the chart above dropped significantly around 40%.
- Given the cost per Th/s rarely changed in such a short period, the margin of Miners decreased dramatically. Therefore, a lot of miners must shut down their mining machines as their gross margin drops below zero.
You can see from the chart above, the Bitcoin total hash rate reduced from 124E level to 85E level, with a 30% drop.
Phase 3: March 26th to April 8th
- This 30% drop will signal the BTC network to adjust the difficulty, however, the difficulty of BTC only adjusts every approximately 2 weeks (2016 Blocks).
- Therefore, the QTh/s ( Qty of BTC mined per Th/s ) didn’t adjust until March 26th. On that day, the difficulty has been decreased by 16% from 16.55T to 13.9T.
- This resulted in the Qty per Th/s increased by 16%, which means the revenue per Th/s had an averaged 16% boost. At the same time, the 20% lowered BTC hash rate, which happened in phase 2, also reduced the selling pressure for BTC.
- A lot of miners, who are forced to shut down their mining machines in Phase 2, are waiting for this difficulty adjustment to bring back their mining machines.
- Difficulty equals block time multiplied by total BTC hash rate. By monitoring the block time as you can see from the chart above, you can calculate the total hash rate change.
- At peak time, the block time had been reduced from 15.4 minutes to as low as 9 minutes by -46%. This means the total hash rates had ramped up by 30%. Together with the 16% difficulty reduction, the block time back to 10 mins designed level.
(iii) Do you foresee any change in the price of BTC (or other major crypto assets) in the foreseeable future? Also, what sort of impact do you expect the upcoming halving event to have on the value of the flagship crypto asset?
What’s going to happen next?
- BTC price will go up because of the recently reduced difficulty, relatively low level of price, with less selling pressure from reduced Hashrate as well. Now, with the steadily increased price of BTC and the reduced difficulty, we entered a new cycle. Follow the logic mentioned, the Miner’s revenue per Th/s will go up.
- Meanwhile, the rainy season is coming for a lot miners in South West China and the turmoil of the global oil market also drives down other energy unit cost. This will drive down the miner cost per Th/s . Therefore, miner’s gross margin will go up significantly and drive up the BTC Hashrates. Around early May it will face a little price pressure but will stay that level with the support from the coming halving.
- With the upcoming halving, the QTh/s will be reduced by 50% at the beginning, then the Revenue Th/s will be reduced by 50% after considering the energy cost going down with 20%. The gross margin will still be down around 30%. Many machines will be closed and give support for the BTC price, due to lower energy cost and no need to cash out the BTC to pay for that energy costs.
- Around 2 weeks after the halving, the difficulty will be adjusted. And this level of difficulty is probably the lowest point. And QTh/s will go up from -50% down back to around -30%. The miners will then keep reopening old machines, which will keep increasing difficulty, then reduce Q QTh/s and finally reached a balanced level and stay stable for a while.
This is what we can analyze and plan. For sure, BTC will keep an uptrend from now to at least 2 - 4 weeks after halving. What we cannot plan is people’s behavior when BTC keeps going up for almost 2 months. Combined with 50% reduction of newly mined BTC supply, we may face a liquidity issue. There is not enough BTC on the market to meet the new buyers as of by attracting from the price appreciation.
If this happens, most likely, the BTC price will keep going up and push up the difficulty to a new high level as well. Then QTh/s will keep reducing and soon reducing less than the -50% of the level before halving. It can go as low as -25% of the original level.
The Cost of Th/s is rarely changed because it depends on the mining machine innovation, and the energy unit cost goes down. It will take years.
What does this mean? QTh/s * Price of BTC = Cost of F/s
- Price of BTC = Cost per F/s / QTh/s , when QTh/s is 25% of the original level, the price of BTC will go up at least 4 times can have the potential to reach $40,000 easily.
- Therefore, the halving will help the BTC price break the headwind at early June and will trend up to reach a new level in a foreseeable future. If this also combines the financial crisis of the current fiat currency world, we cannot even imagine, how high BTC can go for the next 1-2 years.