Bitcoin mining difficulty has just hit an all-time high of 35.61 trillion hashes, a massive 13.55% jump in the past two weeks, and it’s predicted to go up once again.
While that number probably means nothing to most people, such a dramatic uptick hasn’t been seen in nearly 18 months, and the implications for the bitcoin mining sector are not good.Here’s why.
Why does it matter?
Mining difficulty is essentially a stabilisation mechanism for the Bitcoin blockchain.
Since blocks need to be processed every ten minutes on the dot (for reasons we can discuss another time, but in short, because of maintaining scarcity) mining difficulty is automatically reassessed every two weeks to make sure that happens.
More miners on the network mean a higher mining difficulty, since without an adjustment, blocks would be processed quicker due to the higher computational power.
A higher difficulty is good news for the security of the blockchain, because more miners = more safeguards against attacks.
But there is one stakeholder that stands to lose out from this recent surge in difficulty: The miners themselves. Why though?
Another blow for bitcoin miners
Imagine it costs 50c to mint a dollar. Now imagine it becomes more difficult to mint that dollar, costing 75c instead.
That’s essentially what happens to the miners when bitcoin’s mining difficulty goes up- it gets harder and more expensive. Such is the inverse relationship these two metrics have.
The inverse relationship between mining difficulty and mining revenue, laid bare – Source: blockchain.com
Unfortunately for miners, this is just the latest blow in a year of plummeting BTC prices, soaring energy bills, blackouts across Texas (a BTC mining hotspot), and a deteriorating image in the public eye.
Shares in publicly listed miners have consequently nosedived:
- London-listed Argo Blockchain is down 80% YTD
- Toronto-listed HIVE Blockchain is down 73% YTD
- Nasdaq-listed Hut 8 Mining Corp (TSX:HUT). is down 76% YTD
- Nasdaq-listed Marathon Digital Holdings is down 68% YTD
- Nasdaq-listed Riot Blockchain is down 73% YTD
You get the point.
Why is mining difficulty so high?
One wonders why, in a market where BTC is down 60% YTD, more computing power than ever before is trying to get in on the action.
The most obvious reason is that the second largest cryptocurrency ether (ETH) recently ditched mining for another consensus method called proof-of-stake (PoS).
Since PoS doesn’t need much processing power, this has left thousands of data centres with nought to do but pivot to bitcoin or another cryptocurrency that still uses mining.
But this could only be a part of the story. After all, the computers that once mined ETH are not compatible with mining BTC.
The reason could be down to separate, but related, industry: Semiconductors.
Bitmain is the world’s largest supplier of ‘application-specific integrated circuit’ (ASIC) mining machines. Bitcoin miners require hundreds of these units in order to be a competitive bitcoin miners.
Bitmain also relies on semiconductors from the Taiwan Semiconductor Manufacturing Co., the world’s largest semiconductor foundry.
The global semiconductor shortage was one of the biggest supply chain disruptions in recent years, after the world discovered that relying on one Taiwainese foundry for 90% of global supply probably wasn’t a great idea.
A few consumer demand shifts later, and that shortage has turned into a glut, with Christopher Danely, a Citigroup Inc (NYSE:NYSE:C). analyst, telling Bloomberg that the industry’s drop to be the worst in at least a decade, with every company and every chip category likely to suffer.
That means cheaper ASICs; up to 80% cheaper, following Bitmain’s latest price slash on certain units.
"The market is choking on the volume of new hardware, some that was preordered and financed with the hope of expansion," Denis Rusinovich, co-founder of CMG Cryptocurrency Mining Group and Maverick Group, told CoinDesk.
A flooded market for cheap bitcoin mining rigs means miners are likely snapping up new rigs in bulk, thus deflating net mining rewards.
It’s s self-destructive prophesy.
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