Why NOT Mining Is the Optimal Strategy for Bitcoin Cash supporters
Building on the article Why Even Miners That Hate Bitcoin Cash Might Want to Mine It by Jimmy Song, I want to follow his thoughts a few steps further.
I want to note, I am neither a bitcoin cash (BCH) supporter nor I am a BCH hater or opponent. I am a neutral market participant and observer with some background in math.
What Jimmy noticed is that, due to BCH’s difficulty reduction mechanism, it may make sense for bitcoin (BTC) supporters to mine a BCH block. Namely in order to prevent triggering the build-in additional difficulty adjustment in BCH. This way BCH could be held back from profitability, discouraging this way bitcoin miners from migrating to BCH.
Until now (August 5), this mechanism has been triggered 6 times in 6 consecutive blocks 478577 through 478582, reducing the difficulty of BCH by 20% each time, down to 26.21% of the BTC difficulty.
As consequence of that, BCH needs to cost only 0.2621 BTC in order for the mining to be as profitable as the mining of BTC. If the price of BCH lies above 0.2621 BTC, opportun miners will flock to BCH in expectation of higher profits. If the BCH price is below 0.2621 BTC, the miners can only mine BCH at opportunity cost of losing higher profits from bitcoin mining.
The BTC mining market is highly efficient. The mines operate on the verge of profitability at the time of mining, in many cases speculating on rising bitcoin prices after the block is mined. In the effect, the BTC price is on average very close to the marginal cost of mining. That means, that if the price of BCH falls a little below 0.2621 BTC, the BCH mining becomes unprofitable altogether (in the short term) and can be considered rational only if a higher BCH price can be expected in the future.
Naturally, BCH supporters are interested to get the mining difficulty of BCH as low as possible and as quickly as possible in order to make it as profitable as possible.
As of the writing of this article, the BCH price is at 0.062 BTC and the difficulty is at 26.21% of the BTC difficulty. The BCH mining at the moment is highly unprofitable, and mining BTC generates 4.2 times as much revenue at the same cost. So only true BCH believers invest their costly hashing power in mining it.
They are in a dilemma. The BCH price is falling quickly making mining it even more unprofitable. They would need to adjust the difficulty as quickly as possible, cause losing time means getting even lower price again and losing even more money. And the falling BCH price is also a consequence of people angry about long block times, caused again by too high difficulty.
But in the short term adjustment can only happen if the special BCH difficulty adjustment mechanism kicks in. It happens when mining 6 blocks in a row takes over 12 hours. Then, 6 blocks later the difficulty is reduced.
It means, they have to mine slowly in order to reduce difficulty and by doing that they risk even lower price. And only if the difficulty reduction catches up with the falling price, the profitability can be achieved. Then it could potentially even become better than the BTC profitability, which would then attract many miners to BCH and then speed up block times. This would save BCH altogether.
Now, what would be the best way to do it from the game theory perspective?
It would be to … not mine!
Let me explain it in detail. The first approach to fastest difficulty reduction would be to wait 12 hours until mining one block, and then mine 5 next blocks as quickly as possible. Optimally this would produce 6 consecutive blocks in a bit over 12 hours which would trigger 6 consecutive difficulty reductions: 20.97%, 16.78%, 13.42%, 10.74%, 8.59%, 6.87% of BTC difficulty with corresponding profitability price thresholds: 0.2097 BTC, 0.1678 BTC, 0.1074 BTC, 0.0859 BTC and 0.0687 BTC.
Depending on the BCH price at that time, further difficulty reductions would be needed.
But, as described by Jimmy Song in this article, the fiercest BTC supporters with high hash power would (and did already) hinder this strategy by producing BCH blocks in between and effectively deactivating this way the BCH difficulty adjustment mechanism.
So, what should the BCH camp do?
Not mine (or mine BTC). Just wait for BTC to mine the BCH blocks for them and if no blocks are mined in 12 hours then mine a BCH block (and 5 more after that) to get the difficulty down.
This way either all the new blocks on the BCH chain will be mined by BTC camp (crazy, isn’t it!), so — basically free of charge for the BCH miners and at the expense of the BTC camp, or there will be difficulty reductions, bringing BCH closer to the saving shore of profitability.
The long term implications, and the role of the standard (bitcoin) difficulty adjustment, I may describe in another article.
Thank you Jimmy for brain food.