Author | SatoshiLabs
As the price of Bitcoin is on the rise, the gap between its market price and production costs is getting wider . Just as there are many factors that affect the exchange rate, production costs also vary greatly depending on location, energy costs, and software and hardware. Mining mainly depends on efficiency, while price depends on supply and demand .
Braiins operates the world’s first mining farm, SlushPool, and specializes in producing software to help miners improve efficiency. They contributed this article to help understand the internal operation of the Bitcoin mining business. Read on to discover from the source how the fundamental value of Bitcoin is transformed into miners’ profits, as well as the current and future competitive landscape.
As with any asset, the cost of buying a bitcoin will have a premium on the cost of producing a bitcoin . The mining technology is highly specialized and expensive. Due to the unstable asset prices, it is very risky to establish. The cost of electricity also varies from place to place, making this industry very competitive, and some people have much lower profit margins than others. At the time of writing, miners are experiencing a brief period of significant profit margin increases as dominant, hydraulically-powered Chinese competitors move machines between regions as the rainy season ends. This year, migration has led to a 16% drop in mining difficulty, one of the largest declines in history . This shows the impact these huge mining operations can have; what does this centralized computing power mean to other regions?
Supply shock: Both supply and demand have large investments
According to reports, funds such as Grayscale Bitcoin Trust are expected to hold 500,000 bitcoins by the end of this year, and their purchase of bitcoins has exceeded the speed of bitcoin mining. So, what impact will the emergence of these big buyers, including listed companies such as Square and MicroStrategy, have on the mining industry?
As more and more institutions and private companies buy Bitcoin, this seems to have a positive effect on the price of BTC, which in turn has a positive effect on miners. At the same time, due to the halving every 4 years, the role of miners in the market is declining , as new currency issuance accounts for a smaller and smaller proportion of liquidity supply. This is good because it means that miners are unlikely to hit the BTC price when selling to cover costs, and it is also unlikely to suppress price increases when institutional and retail demand grows.
When we shift our focus back to the large companies involved in the mining industry, competition is fierce, which makes the problem even more important. Since the beginning of the ASIC era in 2014, Chinese mining machine companies have had a great competitive advantage. Because the manufacturers are there, they can get new hardware as soon as possible. Now that these big companies and investors have such a strong interest in Bitcoin, miners in Europe and the Americas have access to better funding channels and have formed closer relationships with manufacturers, which in turn has helped them more than in the past. In the past few years, the scale of operations has been expanded more effectively.
Ultimately, the emergence of institutional funds will help promote the redistribution of mining power in Western countries. So, from the perspective of mining decentralization, this is very good. However, it also brings some other potential shortcomings, such as the introduction of KYC procedures linked to the hash rate, and the review of transactions in blacklisted wallets to allow miners to comply with government regulations. Although this is inevitable to a certain extent, Braiins is already working hard to maintain the permissionlessness of mining and the censorship resistance of Bitcoin through the mining protocol Stratum V2 launched last year.
Mining difficulty and profitability
When large mines go offline, the global total computing power will drop sharply. To solve this problem, the Bitcoin network has a mechanism that can reduce the average hash rate required to mine a block, which is the so-called difficulty, to ensure that the block continues to be produced at approximately the same rate . The decrease in network difficulty will lead to a proportional increase in the mining income of the remaining miners. Normally, the difficulty will decrease only after the price of Bitcoin drops sharply, forcing inefficient miners to shut down ASICs (dedicated mining computers) that are no longer profitable.
This time, this is not the case, because the price of Bitcoin has been rising, so miners can dig more BTC after the difficulty drops, and as a reward, the monetary value of these BTC has also greatly increased. This is a huge relief for miners who have been struggling with small profits but quick turnover since the halving in May 2020.
Since the bear market started in 2018, especially after the halving, the increase in difficulty has far exceeded the price. Therefore, the monthly profitability of Bitcoin mining machines is as follows.
Source: BTC profit calculator. BTC profit calculator; over time, monthly profit decreases as the ratio of difficulty to price increases
Now the price has begun to rise rapidly, and it rises faster than the difficulty rise. Therefore, with the passage of time, revenue and profit margins have not continued to decline, but have increased . From this point of view, the prospects for miners look good.
Monthly profit increases over time because the price rises faster than the difficulty (other variables remain the same)
The profitability of miners in November was particularly good because the rainy season in Sichuan, China has just ended. In order to use cheap water and electricity, the miners working there had to move their machines through winter and spring. Unfortunately, for other miners, this means that most of the computing power will be back online in the near future, so the difficulty reduction will be short-lived.
However, as long as the price does not fall back to the level of October, even if all the suspended computing power in Sichuan is re-launched elsewhere, the price increase will continue to increase the profit margin of miners in the next few months.
Open source mining gradually becomes decentralized
As mentioned above, Bitcoin network computing power is concentrated in China, largely because leading hardware manufacturers such as Bitmain and MicroBT are based in China. This means that Chinese miners can get the machines the first time, with lower transportation costs, no international taxes or duties, and better connections with support teams and ASIC repair services. This has caused concerns about centralization from all walks of life, especially in a country where every industry has a large amount of government participation.
At Braiins, we try to reduce concerns about mining centralization in several ways. It all started in 2017-2018, when Bitmain had both AsicBoost and Antbleed hidden computing power incidents. (For those who don’t know, I can summarize here. The hidden AsicBoost is a performance-enhancing component in Antminer S9, which can increase mining efficiency by about 13%. Antbleed is a hidden backdoor in Bitmain firmware that allows Bitmain Remote control and shutdown ASIC).
At that time, MicroBT did not have such a strong strength, and Bitmain dominated the market, so these events were very worrying. The first thing Braiins did was to develop and launch Braiins OS in 2018, as the first open source firmware that publicly enabled AsicBoost’s SHA-256 ASIC. Essentially this means that anyone can get the 13% performance improvement of ASIC for free, while also being able to see our complete source code and verify whether there are hidden backdoors.
Earlier in 2020, Braiins took another important step by developing an enterprise version called Braiins OS+, which includes automatic tuning to further improve performance, making mining more competitive and transparent, and offsetting Chinese miners Supply chain advantages that have benefited over the years. To prove this, you can see how the cost of mining a bitcoin changes, even with the same ASIC (Antminer S9), depending on the firmware it runs.
The original firmware of Antminer S9
Antminer S9 is equipped with Braiins OS+ auto-tuning firmware.
Because Braiins OS+ can help miners increase profitability without investing in the latest and most expensive hardware, its application volume is very large and it continues to grow rapidly. In terms of concerns surrounding mining centralization, this is important for two reasons.
There are fewer machines running Bitmain firmware, and Bitmain firmware has a history of hidden functions and backdoors.
The new Stratum V2 mining protocol included in the operating system will eventually grant miners the right to trade in which blocks, the so-called Job Negotiation, instead of pool selection, which brings more power to individual miners.
For most Bitcoin players who do not mine but care about decentralization, this second point is the most important. To make the Job Negotiation aspect of the agreement available, Bitcoin Core needs to be modified, but there are already thousands of miners using Braiins OS+ and Stratum V2. Once Bitcoin Core is updated, they can all pass Job Negotiation. To help increase the decentralization of Bitcoin.
In general, the mining industry is moving in a positive direction, and North America is becoming a new field of corporate mining business . It is expected that in the next few years, China’s total network computing power share will decline, and competition in the field of hardware manufacturing will also allow the mining industry to develop actively. However, there is one area that has not improved much, that is, the concentration of mines, because all the major mines are in China except for Slush Pool.
As the demand for BTC continues to increase and the supply and issuance decreases, the boom-bust cycle typical of all new technologies is happening on Bitcoin as scheduled. Those miners who think in a time frame of 4-5 years and successfully survive the bear market will make fantastic profits in the coming months. It is hoped that the adoption of Stratum V2 will help reduce China’s share of computing power and ensure that Bitcoin mining has a more transparent and decentralized future.
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