First Mover: Bitcoin Just Got Easier to Mine, but for How Long?

Bitcoin's mining "difficulty" has undergone its first adjustment since last week's halving, dropping the figure by 6%.

Mining difficulty is part of an automatic procedure that takes place on the Bitcoin blockchain every 2,016 data blocks, or roughly every two weeks. The mechanism is supposed to help keep the blockchain network humming along steadily: When computational power flags, the difficulty of finding new bitcoins automatically adjusts downward, helping to restore miners' profitability and encouraging them to crank their machines back up.

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That's what happened on Tuesday when the mechanism automatically responded to the miner shakeout that took place following last week's quadrennial halving on the blockchain. In the halving, the number of new bitcoin produced with every data block got cut in half, so it took a steep toll on miners' profitability.

A drop in mining difficulty theoretically favors miners that have remained in the game. With less competition from the miners that got shaken out, they stand to benefit from a newly improved chance of winning freshly minted bitcoin.

But a drop in difficulty can also make obsolete equipment profitable again.

A report Tuesday from data firm Coin Metrics found many of Bitmain's Antminer S9s bitcoin-mining computers, which saw their heyday in 2018, powered up in response to bitcoin's recent price increase past $9,000. The halving made them less profitable, but the easing in mining difficulty should help to improve margins.

It doesn't hurt that the S9s are available at rock-bottom prices on the secondary market, from $20 to $80. With such a tiny capital investment, the only real consideration is whether revenue from mining exceeds the costs, primarily electricity.

The dynamic shows “the degree to which mining with old hardware may be viable given favorable conditions, and the ease with which this less-expensive hardware can be deployed,” according to Coin Metrics.

Due to what has been generally an ever-increasing amount of computational power on the network, bitcoin’s mining difficulty has almost always trended upwards. That's not to say there haven't been dips, such as the precipitous drop at the end of 2018, after as many as 800,000 miners turned off their rigs following deep price drops.

But the current difficulty is still well over double what it was this time last year – a sign of just how competitive the mining business has become.

At bitcoin's current price of $9,776 and using the latest Antminer S19 Pro, a single miner paying the U.S. average electricity price of $0.13 per kWH could expect a profit of $0.97 a day, according to profit calculator NiceHash.

So unless there’s a meteoric price rise, a subsequent increase in difficulty would quickly erase the incremental profit miners gained from Tuesday's difficulty dip.

And if the chart above is anything to go by, that’s only a matter of when, not if.

Taken alone, the dynamic shows that, while the network's design comes with temporary adjustment mechanisms to help keep miners on the network, it's ultimately bitcoin's market price that's most influential in fattening their profit margins.

More broadly, some observers of the network worry that there's no end to the longer-term trend of bitcoin mining power consolidating in a handful of major entities. These stronger hands have enough capital to buy equipment, enough equipment to assure steady revenues, the ability to purchase electricity at wholesale prices and the fall-back resources to weather market downturns.

Negative adjustments happen infrequently. According to CoinDesk's Zack Voell, there have only been 49 in the protocol's history.

With total network hash rate down 20%, it's possible mining difficulty could well fall again at the next adjustment date in two week's time.

But Tuesday's drop in mining difficulty will likely will prove a blip in that longer-term trend, and bitcoin’s mining power will continue to consolidate. Ultimately, many of the smaller hobby miners who once dominated the network will get priced out.

Earlier this year, pseudonymous crypto analyst Hasu argued in an op-ed for CoinDesk that although the concentration of mining power was “inevitable,” it wasn’t necessarily all bad.

In fact, greater concentration was “harmless, as attacks on bitcoin incur an opportunity cost that scales with the amount of hash power an attack controls,” he said. “An attacker with a lot of hash power would incur a large cost.”

Tuesday's difficulty adjustment might help keep those S9 machines online for just a little while longer.

Eventually, though, only a rocketing bitcoin price would be enough to save them.

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Bitcoin watch

BTC: Price: $9,750 (BPI) | 24-Hr High: $9,899 | 24-Hr Low: $9,577

Trend: Bitcoin is trapped in a narrow trading range between $9,450 and $10,000 for the third straight day.

Technical indicators and on-chain metrics favor a range breakout, or a sustained move into five figures, however. For instance, the 50-day and 200-day averages are about to produce a golden crossover, a long-term bull market indicator.

Further, the weekly chart MACD histogram and the relative strength index are reporting bullish conditions, validating last week's violation of the descending trendline connecting the June 2019 and February 2020 highs.

Meanwhile, the number of bitcoins held on exchanges has dropped to 2,324,674, the lowest level since May 20, 2019, according to data provided by blockchain intelligence firm Glassnode. The metric has declined by over 11% in the past two months and indicates strong holding sentiment in the investor community.

The Puell Multiple, too, has declined to levels below 0.50, indicating the cryptocurrency is undervalued. The metric is calculated by dividing the daily issuance value of bitcoins in U.S. dollar terms by the 365-day moving average of the daily issuance value.

A range breakout, if confirmed, would likely yield a move toward $10,500 (February high). A violation there would invalidate the lower-highs pattern seen on the weekly chart and strengthen the case for a re-test of the 2019 high of $13,880.

Alternatively, if the buyers fail to defend the lower end of the trading range at $9,450, a deeper decline to the 50-week average support at $8,795 could be seen.