Bad news for those mining Bitcoin
Indeed, for the first time in its history it has exceeded 40T, bringing it to 43T.
The previous record was set at the end of January, when the difficulty rose to 39.35T, but after a slight drop on 12 February, it took off on Saturday, catapulting to 43.05T.
This means that mining Bitcoin has become more difficult than ever, although thanks to increasingly efficient machines, the block-time remains around 10 minutes.
On Saturday, the block-time had actually spiked up as well, exceeding well over 13 minutes, but yesterday it was back below 9 minutes.
Why the difficulty is problematic for Bitcoin miners
For Bitcoin miners, a high difficulty means higher energy consumption.
In fact, the higher it is, the more hashes will need to be mined before finding the one that validates the block and grants the right to cash in the prize, currently 6.25 BTC.
Extracting hashes means performing calculations that require some energy expenditure, so the more hashes that need to be extracted, the more energy must be consumed.
On the other hand, using more efficient machines means consuming less energy for the same number of hashes extracted, so energy efficiency allows rebalancing the higher costs due to higher difficulty.
Block-time
Everything revolves around block-time, which is the time it takes on average to mine individual blocks.
Satoshi Nakamoto had decided that an average of one block should be mined every 10 minutes or so, and this rule has never been changed.
Hence, even today in theory the Bitcoin protocol should self-adjust to keep the block-time as close to 10 minutes as possible.
This adjustment happens precisely with the difficulty, which is adjusted every 2,016 blocks, or roughly once every two weeks.
Last week the block-time remained almost constantly under 10 minutes, with a minimum peak of 8 minutes on 16 February.
With such numbers, an upward adjustment of the difficulty at block 778,186 was inevitable, though such an increase was not expected. It was an increase of almost 10%, leading in one fell swoop to a new all-time record, and to the 40T being exceeded for the first time.
It is enough to consider that exactly four years ago the difficulty was at 6T, and eight years ago at 44G, or 0.044T.
The hashrate level
While the reason why difficulty is increasing is because block-time is too low, the reason why block-time is decreasing is because hashrate is increasing.
Hashrate, or hash power, is the number of hashes that Bitcoin miners collectively manage to mine in one second.
Taking the seven-day average as a reference, the all-time high in this respect was reached on 20 February, when a daily average of 323 Eh/s was reached over the seven days.
It means that in the seven days from 14 to 20 February 2023 an average of 323 Exahash, or 323 billion billion hashes, were extracted worldwide every second.
There are many machines in the world that specialize in extracting hashes, so-called ASICs, and generally each of them can reach up to even more than 250 Th/s. So it only takes a million similar machines to reach 250 Th/s, and large mining farms have tens of thousands each.
Since there are now hundreds of large mining farms in the world, plus many thousands of smaller ones, it is quick to get to 250 Eh/s, or even more.
For example, a year ago the total hashrate of Bitcoin mining was about 190 Ehs, and four years ago it was 44 Eh/s. Not surprisingly, the current hashrate is about seven times that of four years ago, and the current difficulty is still about seven times that of four years ago.
The costs of Bitcoin mining
The energy consumption of Bitcoin mining in the short run increases proportionally as the hashrate increases. But in the medium and long run it does not, because more efficient machines are constantly coming out that for the same hashrate consume less, or for the same consumption produce more hashrate,
Indeed, as of today, the total annual consumption of Bitcoin mining is estimated to be about 90 TWh, but four years ago it was about half that.
In other words, in seven years hashrate has grown seven times, but consumption only two times.
Moreover, the highest consumption ever took place at the end of 2021, which was after Bitcoin’s price reached a new all-time high, pushing it to over 200 TWh.
The reason for this is that consumption is actually matched by the miners themselves to earnings, so the more they collect, the more they can run the machines with higher consumption.
Hence, it is inevitable that the maximum consumption occurs when earnings are at their highest, and since the reward is always 6.25 BTC per block, at least until next year’s halving, it is the market value of BTC that fluctuates consumption the most.
Clearly, the key issue here is cost, particularly electricity, so consumption actually goes down, for example, if the price of electricity goes up. That’s why it more than halved during 2022 as the cost of electricity went up.
The earnings from Bitcoin mining
The reality for those who mine Bitcoin is that the earnings are not fixed.
Even though about 6.25 BTC are always collected every 10 minutes or so, these are by no means distributed equally to the different miners.
Mining is a competition in which the single block validation prize is given to the individual miner who extracts the hash that validates the block.
This is why miners compete to have as much hashrate as possible, so as to maximize the chance of mining that single hash. And that’s also why they pool together and then split the revenue in proportion to the number of hashes extracted.
Furthermore, there is always the problem that the actual profit depends on the market value of Bitcoin, because cashing out 6.25 BTC when a Bitcoin is worth $69,000 is one thing, while cashing it out when it is worth only $23,000 is another.
Indeed right now, with the difficulty at all-time highs and a market value of BTC that is 66% below the all-time high, profitability for miners is close to the lows of November and December, when it touched an all-time low.
It is worth noting, however, that the profitability of Bitcoin mining varies greatly depending on the efficiency of the machines being used, and globally it is only an estimate that may not even be accurate.
From this data, it is clear why 2022 was the worst year ever for Bitcoin mining.
