In spite of market challenges, bitcoin mining is booming.

 In spite of market challenges, bitcoin mining is booming.

According to the most recent data, mining bitcoin has never been more difficult. 

After registering a remarkable spike of over 10% on January 15, the network's mining difficulty reached a new all-time high of 37.59 trillion hashes, the largest jump since last November—the only time in 2022 when mining difficulty grew by a double-digit percentage.

In addition to having a high mining difficulty, data from CoinWarz reveals that despite briefly falling after Terra's collapse in May 2021, Bitcoin's hash rate, which is best described as the network's processing capacity, has been gradually increasing over the last three years. 

Bitcoin's hash rate peaked on January 6, 2023, at 361.20 EH/s (ExaHashes per second).

When combined, hash rate and mining difficulty show a robust and expanding network. 

Nevertheless, there have been a lot of recent indications that the mining industry is facing significant challenges. 

Last September, the Nasdaq-listed Bitcoin miner Core Scientific filed for Chapter 11 bankruptcy, and Compute North, a provider of data centers for blockchain startups and crypto miners, did the same. By signing a partnership at the end of the year with multifaceted cryptocurrency company Galaxy Digital, mining operation Argo was able to avoid doing so.

In order to strengthen their balance sheets, several miners have also begun selling off their Bitcoin holdings.

In addition to all of this commotion, Bitcoin's hash price, a phrase created by mining platform Luxor to describe the possibility for mine to generate cash, is down 43% from its average value from 2022. For some miners, mining margins have never been lower due to the slump and rising energy costs. 

Even said, Bitcoin mining is still a lucrative business for some, and it's becoming more and more popular worldwide.

Decrypt spoke with some of the sector's executives to separate fact from fiction and gain an understanding of why mining operations continue unabated in the face of falling Bitcoin prices and widespread insolvencies.

Hash rate and mining difficulty: a brief introduction

Every 2,016 blocks (approximately every two weeks), the Bitcoin network determines the difficulty of mining Bitcoin, or how much processing power is needed to earn it, based on the supply and demand of miners. 

The rivalry to confirm a block (and receive the reward) increases as more miners are deployed, which ultimately increases mining difficulty.

However, when difficulty rises, miners may see their revenues decline if Bitcoin's price stays flat since they will need more processing power and electricity to mine a certain amount of value.

It is impossible to gauge the sector's temperature only from mining difficulty measurements because increased difficulty also signals a robust and expanding network. 

The hash rate now. Simply put, Bitcoin mining equipment work to validate logs of transactions, or "blocks," which are then added to the cryptocurrency's immutable distributed ledger system. Block rewards in the form of Bitcoin provide miners with a financial incentive to do this.

Every time someone tries to break the encryption, a new code known as a "hash" is created. The reward and addition to the blockchain go to the first miner who transmits a candidate block's valid hash. This encourages miners to validate their blocks rapidly. 

A obvious indication of the network's performance is the number of attempts (or hashes) that Bitcoin miners can make to crack the code in a second, which increases with the hash rate. 

The Bitcoin network is currently functioning at an astounding 273.76 EH/s, which translates to roughly 273 quintillion codebreaking attempts per second made by miners.

Miners' condition

According to experts, mining economics has a way of separating the wheat from the chaff.

According to Scott Norris, co-founder of Bitcoin miner LSJ Ops, "the short answer is that most of the over-leveraged miners have already dropped off the network and just the quality and low-cost miners remain." They have experienced numerous bad markets in the past and have a model that has kept them going, in addition to having a cheap energy cost. As a result, the network drop-off isn't as significant as it once was.

Additionally, despite the fact that struggling companies like Argo and Compute North are in the news, they haven't actually turned any machines off and are still turning a profit, albeit at a lower margin. 

Despite having a big exposure to Compute North, Marathon Digital Holdings, the second-largest mining company in the world by market capitalization, continues to grow its Bitcoin holdings.

The VP of Corporate Communications, Charles Schumacher, stated: "Obviously, there have been challenges to overcome, but all of our miners are still operating. The majority of our active miners are currently located in the location where Compute North once operated. That's on a wind farm in Texas and is currently run by U.S. Bitcoin Corp. 68,000 miners work there.

The overall company staff is "near to 30 employees presently," he added, adding that "because we outsource, we can run relatively lean." He said that "negotiating contracts and what we're paying for electricity, and a large part of it is the efficiency of our [mining] fleet" were other reasons for Marathon's tenacity.

Additionally, Marathon has been adept at negotiating financial markets and raising money at advantageous times: "We haven't ever been compelled to sell Bitcoin. We've let individuals know that we plan to start selling some to help with operating expenses. Before we began, we wanted to ensure that our production was expanding since we didn't want to have to use the equity markets to pay for employee salaries. The business should ideally pay for that, and we would then use outside finance for expansion. 

Marathon is one of the miners that are currently using rigs that were purchased in advance. According to Joe Burnett, head analyst at Blockware, this is a standard technique.

"Building out mining infrastructure can take years. According to him, some of the infrastructure that went online in 2022 and even the beginning of 2023 was paid for with money raised in 2021. This is due to the inability to quickly obtain energy, construct sizable mining facilities, manufacture, order, and ship mining equipment, or plug them in. 

Not only mining economics and depressed prices can have an impact on the industry. Recently, unexpectedly, Mother Nature contributed to the most recent turbulence.

According to Colin Harper, head of content and research at mining site Luxor, an increase in mining difficulty of more over 10%, like the one observed last week, is "quite extremely high."

This recent significant growth spurt was not brought on by a sudden, massive hardware rollout, though. Instead, a stretch of unfavorable weather in North America before Christmas was to blame for a negative adjustment that was quickly reversed by an upward readjustment.

According to Harper, "as the cold front swept across North America, some miners shut down due to operational difficulties, while others reduced their power consumption to provide electricity back to the grid in reaction to power shortages." 

But after the severe weather passed, those miners went back online, increasing hash rate and causing a significant increase in mining difficulty, according to Harper.

37 EH/s, or over 14% of Bitcoin's hash power, went offline due to the cold snap, which caused block times to dramatically slow down and the mining difficulty adjustment to decrease by 3.59% on January 2. 37 EH/s reconnected when the terrible weather passed "explained he. "The upward adjustment we witnessed on January 15 was due to faster block timings, which led to faster block validation.

'Someone, Somewhere' will always mine Bitcoin

Energy is currently not in a bear market, notwithstanding Bitcoin. 

Industrial electricity costs have increased 16% between 2021 and 2022 compared to this time last year, while the cost of Bitcoin has virtually halved. 

So, at what price would mining stop being profitable for Bitcoin? It's complicated, I guess.

According to Harper, a miner operating an S19j Pro that generates 100 terahashes per second is currently breakeven at $0.096/kWh power expenses. "That breakeven would become $0.048/kWh if Bitcoin's price were to drop in half from here." 

In essence, Bitcoin mining would cease to be lucrative only if its value reached zero.

Even in the most extreme nuclear bear market situations, "someone, somewhere has power cheap enough to mine BTC," he said. 

Bitcoin is currently trading at over $23,000, and it appears that many miners are returning to the game.

Article Credit: Decrypt

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