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Bitcoin Mining The Evolution of A Multibillion Dollar Industry Yassine Elmandjra, and Derek Hsue, Mining “Death Spiral” In December 2018, Bitcoin’s mining difficulty dropped 15%,61 a rate surpassed only by the 18% drop in November 2011. The magnitude of the drop created fear that Bitcoin mining had entered a death spiral. A ‘mining death spiral’ is a hypothetical scenario in which miners cease to find blocks. As laid out by Arjun Balaji, the argument for a miner-induced death spiral is as follows: bitcoin prices drop materially, closing down marginally profitable miners. Block times increase, slowing transactions and crushing the confidence of speculators who sell their coins, causing a further implosion in hashrate. Bitcoin blocks slow to a crawl and, because they are based on each 2016 blocks mined, difficulty adjustments render mining impossible, causing Bitcoin’s “death.” Ironically, we believe mining profitability provides the case against such a death spiral. After a proof of work difficulty adjustment, miners still in the network should garner a larger percentage of the hashrate, increasing their probability of finding and profiting from the next block. As a result, higher rewards per block should compensate for bitcoin’s price drop, obviating the mining death spiral. Bitcoin’s proof of work difficulty adjustment also should prevent the death spiral. Proof of work difficulty62 measures the difficulty to hash a block. Difficulty is predetermined so that on average the hash of a block takes roughly 10 minutes. Every 2016 blocks, the Bitcoin network reassesses its global hashrate to determine whether the difficulty is consistent with the network’s ability to find blocks every 10 minutes. Even during a significant drop in the hashrate prior to a difficulty adjustment, based on their contractual obligations - particularly those associated with leasing, electricity, and equipment - some miners are likely to mine at a loss in anticipation of the next downward adjustment in difficulty, preventing a death spiral. VI. The Future of Bitcoin Mining In our view, Bitcoin mining will become increasingly competitive. While new entrants are competing against mining and manufacturing incumbents, existing players are struggling with the commoditization of hardware and a collapse in profit margins.63 Access to cheap energy will become further distributed as more global energy is devoted to mining Bitcoin. It will become harder to obtain larger amounts in any specific region, and regions that have historically experienced energy arbitrage opportunities will continue to be met with fierce competition. At most stages of the hardware supply chain, hardware commoditization and competition are 61 62 63 “The ‘Bitcoin Mining Death Spiral’ Debate Explained.” The Block, www.theblockcrypto.com/daily/4449/the-bitcoin-mining-death- spiral-debate-explained?_hsenc=p2ANqtz-84N5CTwJwY3IPCH-i8OF6p6xjgBjKhtCyEfV8ZKYZo4Ox0blUy23v1kgxphFeHhhBWQf- TApBc94Vn4HZoLwPFpERHAg&_hsmi=73263624&utm_source=hs_email&utm_medium=email&utm_content=73263624. “Difficulty.” Difficulty - Bitcoin Wiki, en.bitcoin.it/wiki/Difficulty? “Japan’s Internet Giant GMO Quits Mining Hardware Bussiness.” Bitcoinist.com, 26 Dec. 2018, bitcoinist.com/japans-internet-giant-gmo-quits- its-mining-hardware-bussiness/. 24PDF Image | Bitcoin Mining
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