Bitcoin Miners Get Breath of Fresh Air, Difficulty Plummets

A much-anticipated moment in the Bitcoin blockchain has provided some mining operations with relief as the difficulty dropped significantly.

After several years of continuous growth in difficulty and hashrate, Bitcoin is experiencing a strong withdrawal from the norm as larger mining operations start shutting down some of their older hardware and smaller ones disappear from the map.

By the numbers, this resulted in a 15.13% drop in mining difficulty registered today, following another drop of 7.39% on November 17. To put things into historical perspective, such a drop has not been seen since October 31, 2011 at 5:42 AM GMT, when mining difficulty took an 18.03% plunge following another 13.09% descent two weeks earlier, according to data taken from BTC.com.

Although this sounds like a doomsday scenario, it could help provide relief to mining operations that were starting to experience losses but were holding out for the difficulty adjustment. Operators with more efficient computers could start switching some of those ASICs on to make their hashrates more competitive.

The flipside of a difficulty purge

An opinion piece penned by Leavy School of Business professor of finance Atulya Sarin at MarketWatch said that the drop in mining profitability marks the collapse of Bitcoin’s value. He argues that most miners today aren’t concerned with the security of the ledger but instead are “fair-weather miners looking for a quick buck who could quickly disappear once the opportunity dissolves.”

“Mining at a cost higher than the cost at which you can sell in the futures market destroys value. So, any rational investor [...] has no incentive to mine if the cost of mining is higher than the future price and is better off buying in the futures market… Absent the mining activity, Bitcoin is just a set of encrypted numbers with no value,” Sarin added.

The silver cloud

Although Sarin put a great deal of thought into how Bitcoin would fare without its miners, it was not absolutely necessary to entertain this scenario. His argument was based on the fact that Bitcoin needs to be at a support level of $5,000 at its current hashrate for mining to break even.

However, it doesn’t seem as if though he considered the fact that mining difficulty fluctuates according to the overall network hashrate once every week or so. Because of this, even if the only equipment left mining Bitcoin were 100 computers in some dorm rooms, they would perpetuate the network anyway—albeit, with more vulnerability to 51% attacks.

One doesn’t even need to think of these scenarios, though. Mining companies are always looking for cheaper electricity, and the most competitive operations manage to find places like Ocean Falls, CA to provide them with near-limitless dirt-cheap electricity.

There are also miners taking advantage of Iceland’s combination of cold climate (less money invested in cooling and maintenance of equipment) and cheap geothermal energy. They want to avoid the regulatory environments of futures trading, so even with slim margins, mining remains an easy way to make semi-predictable returns.

And even if, say, Bitmain or BTC.com would want to invest in BTC futures, what stops them from doing so on the side while keeping their mining operations running? These two things are not mutually exclusive.

If they can’t make a buck in two weeks’ time, the difficulty will reflect that and the market naturally would—as history has already proven in October 2011 and December 2012—consolidate around the miners that achieve the best return on investment. This may have been one reason why Squire Mining recently acquired CoinGeek’s assets, making it the largest publicly-traded miner.

Although the silver lining is thin for miners themselves, Bitcoin’s algorithm makes sure that mining collapses are nothing but silver clouds for the rest of the community.

Reading now