The History of Mining & its Influence on Bitcoin’s Price

Since the first Bitcoin block was created and validated in 2009 quite a lot has happened in mining. Today we’ll discuss the outlines of the history of mining. We’ll also be touching on an even more exciting subject: the influence of mining developments on Bitcoin’s price.

You’ll have to hold on for a bit before we get to that though.

Mining is one the most important aspects of the Bitcoin Network. Why? Because none of it would function if it weren’t for the miners: they verify transactions and create blocks.

In our article on mining basics (check it out here) we explained hashrates. An extremely concise recap: when a lot of people are trying to mine a new block, all of their computers are trying to come up with a valid hash. The amount of computational power they have determines the hashrate. The following graph shows that more and more people joined in, dramatically increasing the hashrate.

Table of Contents

The initial miners

At the beginning of Bitcoin, miners were able to work with their own, more or less standard PCs. Any old desktop with simple software would do the trick and mining was pretty much a basement hobby for geeks.

Mining does take up a lot of the computer performance, shown in a Windows Task Manager here:

CPU usage of a normal PC before and during BTC mining

Juxtaposed are the normal CPU usage of a standard (Windows) desktop with and without mining software running. The mining software drains so much capacity that it’s nearly impossible to use the computer for anything else whilst mining.

Back in the day, the integrated CPU was used for mining. Optimization was only possible by buying a better computer (or building a better CPU into your machine). At the time (we’re talking the year 2009/10) 4 core processors were available: the first generation Intel i7.

But things were about to change.

The Different Stages in Mining Development

The following graph shows the developments of the mining equipment that was pushed by the need for for better performance and higher hashrates.

Development of hashpower (in Mhash/s) and energy efficiency (in Mhash/J) on a logarithmic scale for different hardware components across time.

Source: https://en.bitcoinwiki.org/wiki/Why_a_GPU_mines_faster_than_a_CPU

You can tell by the two axis in the graph that mining had to be developed further. Why?

First up: Performance

The more hashrate you have, the bigger are your chances to find the nex block. Since the performance of standard CPU components left room for improvement, miners started looking for specific hardware solutions.

Secondly: Energy efficiency

The simple solution of setting up several CPUs and having them run at maximum capacity 24/7 turned out to be way too expensive. The energy use of the machines had to be reduced somehow and any superfluous process taking up power should be shedded. An example: the operating system on personal computers.

A quick recap:

  • CPU Mining
    At the very beginning, your run-of-the-mill personal computer was more than good enough to catch a Bitcoin block every now and then. The block reward back then was 50 BTC.
  • GPU Mining
    When talking of GPU mining, people mean the graphic boards that were more efficient in mining than the aforementioned CPUs. With their much higher hashrates, GPUs took over the market. Want to know why they are the better processors? Check out this video: klick
  • FPGA Mining
    FPGA were the first programmable chips that could be adapted for cryptomining. Their energy usage is way below that of the GPUs, making them even more efficient than GPUs.
  • ASIC Mining
    ASICs were developed only for mining cryptocurrencies. Each hardware component was designed to have the best performance in mining. Any self-respecting mining operation runs its business mostly on ASICs now.

To put it simply: The mining evolution went pretty quick (perhaps revolution would be the better word) and always fuelled by the need for better performance and lower energy usage. Let’s compare it to Dragonball Z.

Vegeta, what does the Scouter say about its Hashpower? It’s over 9.000!

What is a mining rig?

Mining rigs were developed in order to run several mining components at the same time. Instead of wasting space with entire towers, miners constructed customised racks and rig, allowing for a whole row of processors to run on one operating system.

The word “rig” was not a cryptominer invention. Rigging is used in seafaring (the ropes) and as the stage equipment that keeps heavy loads (lamps, props) in the air over a stage. In mining it means placing several processors next to each other that run on one system.

The visualization of the different layers in the graphic above is not completely correct. GPU mining did not come to a full stop before 2012. Today, still, some miners prefer working with GPUs. Have a look at the retail prices of GPUs from AMD and nVidia.

Anything catch your eye?

Graphics card price trend 1999–2016

Source: http://www.3dcenter.org/news/die-entwicklung-der-grafikkarten-preise-1999-2016

Exactly!

The prices keep going up and nVidia had clear spikes in the years during which the block rewards were halved (more information on that later). Miners were obviously looking for newer models. Not just to keep up with heavy graphics in games like Masterrace, but in many cases to hunt the next Bitcoin block.

What does a mining rig look like?

The different stages of mining development can be illustrated by some of the images in the Hashtrend scrapbook.

Whilst still located in the Netherlands, the machines were running with a manual cooling system. That entailed putting normal fans behind the home-made racks and hoping for the warm air to leave through the window in the corner.

At a later time, the wooden racks were replaced with more sturdy materials (and therefore became less of a fire hazard instantly). The new metal racks were installed in a larger data center, filled with ASICs and wired up properly. The individual ASICs are no longer visible.

Finishing such an amount of rigs should not go unnoticed! After hours and hours of work, proud miners used to post the results all over social media.

#LookWhatIDid

https://twitter.com/cryptochrisw/status/1037370122229481472

The relationship between hashrates and difficulty

Regardless of the amount of hashpower available in the Bitcoin network, some mechanism has to ensure that only one block is mined every 10 minutes. This is why the developers implemented a dynamic difficutly. The following chart shows you the development of the Bitcoin difficulty.

Mining stages over time

Source: https://www.blockchain.com/de/charts/hash-rate?timespan=all&scale=1

In the article “Cryptomining — What do miners actually do?” we used a couple more words to clear up difficulty. Essentially, the difficulty will rise parallel to the increasing hashpower available in the network.As soon as new and more powerful hardware is introduced, we see a sharp increase of the difficulty.

The search for a valid nonce in mining can be compared to a silly game you might remember from your childhood. Hide and seek. (We still play this regularly at the office.) Say we reverse the game: one person hides and the rest searches. Whoever finds the hidden person first, has won the game.

Hider: Tim = Bitcoin block

Searcher: Group of x people = miner

To make sure the game is fun to play, it shouldn’t take forever. After 4 hours of scrounging around the forest, no one can be bothered anymore and will just give up and return home. Tim, not aware of anything, is left behind and eaten by wolves. This is where we want to step in. We haven’t got anything against wolves, but we need Tim in the game.

To ease up the game, you could allow for more people to search. Rather than going through all the trouble alone, you can ring up some friends and get them to help out. That would result in more search/hashpower. Some of your mates might have brought some binoculars and a guide on how to find people in forests (specialized mining hardware), making them the better searchers.

If you overdid it on the invites, your semi-pro friends will have found Tim within no time. That makes for a really boring game that doesn’t last as long as it should. In order to even out your friends, we now have to raise the difficulty. Tim gets a few more acres of forest and swamp to do his thing. If your search army grows again, we’ll add even more land. This way, the search-find-ratio remains stable.

When we switch back to Bitcoin, the difficulty guarantees the planned minting of new coins needed to stick to Satoshi’s plan.

Moneros difficulty is a bit different

The Hashtrend mining experts proofread our story and agreed on the technical infos. So we were all happy. Then they pointed out, that the hardware development goes for nearly all minable coins. But Monero is different. Whilst CPU mining was rendered useless for most coins and replaced by ASIC mining, Moneros developers don’t like ASICs.

Why not?

Originally, mining was invented and developed to enable the decentralized generation of coins. Decentralization is the magic word for everything in crypto now — you will have picked it up somewhere already. The development of ASICs has come to threaten this decentralization. They have formed a mining elite that can afford to buy and run ASICs, which has become more and more expensive over time.

With ASICs becoming more and more expensive and the efforts of running a mining operation have long since exceeded the hobby stage, certain consolidation of mining power started taking place. Individual people can no longer operate a lucrative mining Op. Large data centers and mining pools determine the world map. Especially the strong mining pools in China have been accused of (re-)centralizing Bitcoin. One of the places where you can join in the global discussion is here: click.

Monero hashrate over time

Source: Monero Difficulty 10/2017–10–2018
https://bitinfocharts.com/de/comparison/monero-hashrate.html#1y

A few coins like Monero and ZCasH want to stay away from these mighty mining pools and make sure to stay ASIC resistant. By constantly updating their protocol, they keep “bricking” newly developed ASICs.

This graph shows a sudden decrease in XMR difficulty. Most people suspect that a Monero-ASIC was introduced at this point. Official statements on this suspicion are scarce.

Monero basically rejects the use of ASICs because they are not readily available to any normal consumer. As soon as Bitmain produced a special ASIC, Monero forged a protocol adaptation during the next hard fork, rendering the Bitmain circuits completely useless. Core developer fluffypony explained on Github and in several interviews, that the ASIC resistance of Monero will be dropped as soon as ASICS are easy to buy and use for everyone. Up until then, the developers will always try to sabotage any ASICS during normal hard forks.

If you want to get deeper into the subject, check out the Medium article: “Was Monero’s PoW Change A Success?”.

There is no reason to expect a similar development in Bitcoin. In the foreseeable future, ASIC mining will be the only lucrative way of Bitcoin mining.

Mining & Bitcoin’s price — What are the connections?

Some traders tend to forget that mining affects the value of a coin when analysing rates. Sometimes, changes in mining can cause remarkable changes in price.

To understand the correlation, we’ll do you another graph with two curves. This should be easier than just describing.

Source: https://cointelegraph.com/news/worlds-best-performing-currency-bitcoin-inflation-rate-drops-to-4

What you can see:

  • Blue line:

Bitcoin eventually reaches its maximum of 21 million coins

In the course of time, less and less coins are generated (because of the halving of the block reward)

  • Orange line:

Logarithmic scale for the inflation of Bitcoin

The inflation is lowered step by step in accordance to the halving of the block reward and reached just over 1% in 2020.

How do these things relate? If you paid attention during history class at school, you might remember the hyperinflation in 1920s Germany. Put simply — money loses its value, when a lot of new money is brought onto the market. In the historic Weimar Republic example, the money was basically worth less than the paper it was printed on.

When we check in with the Bitcoin graph again, we see that with the halving of the block reward every 4 years, the number of new coins added to the market is halved as well.

The lower the inflation, the less pressure on the price.

This simple relation must always be considered when making a long term Bitcoin price analysis.

Instead of inflation, we can also use the supply and demand to visualize the mechanism. In the year 2020 the supply will not be far from the total possible supply. As we have seen, almost half of all planned Bitcoin were on the market in 2012. We are convinced that more people will find an interest in Bitcoin over the coming years. This will push up the demand at a much larger pace than the generation of new Bitcoin.

Supply, demand and price relation (simplified)

In reaction to this shift, the price of a Bitcoin will rise because more people wish to buy and own Bitcoin. Many of the price predictions over one million that sound ludicrous today are based on the assumption that the demand will rise.

What do miners have to do with the price?

Mining farms involve a lot of maintenance. Costs that must be considered cover electricity, rent, staff, etc. A profitable operation has to sell its own mined Bitcoin to pay for its bills. This makes miners into one — if not the most important seller groups on the market place.

Every time the block reward is halved, the influence of the miners a seller group decreases. They will be bringing fewer new coins to the market.

That’s all in theory. In a technical chart analysis it is easy to recognize the Bitcoin price reactions during mining developments in the past.

BTC / USD weekly chart (2016 halving)

As you can clearly see, the Bitcoin rate has slowly climbed over the last 9 months before changing to a much steeper increase. The catalyst for this development was the price itself. New investors heard about Bitcoin and wanted to join in. They collectively started buying Bitcoins during the 2017 “hype”. The preliminary climax was somewhere in December.

During the following phase the market cooled down, right up to one year before the next reward cut. In 2014 the cool-down was exaggerated by the hacking of online exchange Hack von Mt Gox.

It is difficult to predict the actual influence the next halving of the block reward will have on the Bitcoin price. You should keep in mind that the future halvings are not as big as the past ones. When trying to determine the effect of the miners’s sales, the price of a single Bitcoin and the market volume will be important factors.

The future of mining

If we leave the risky and controversial price predictions be, we can focus on mining itself. How should it be developed and does it have a future?

Miners themselves have to optimize each aspect of their operation. This will lead to professional mining with no real opportunities for hobbyists.

Mining operations will be ran in professional data centers.

The potentials of increasing the efficiency of mining lie in this change from hobby to day job. Focussing on an ASIC only will no longer cut it. Miners have to scrutinize each component of their operation:

  • National and regional energy rates
  • Batch discounts on hardware
  • Automation of maintenance and controlling
  • Reduction of time-to-market

These are only a few of the challenges miners are facing in the near future.

Large manufacturers like Bitmain will have to prepare for competition. In Japan, Samsung

has declared it’s planning the production of ASICs. The decentralization will change from millions of little miners to a few bigger pools.

Conclusion

Mining has come a long way in the last few years. The main reason for that is the technical development and to a certain extent also the high rewards. Miners are important players in the cryptomarket. They ensure the running of the network, the verification of transactions and the generation of new coins.

What started as a basement hobby for a few geeks turned into the first improvised mining rigs (and the proud presentation of these rigs on social media) and eventually morphed into large mining operations in professional data centers. We may expect an even more efficient running and improved hardware and software solutions to be developed soon.

Mining’s history is very much still going.

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