There has been much ado made recently over supposed seasonal mining fluctuations on the Bitcoin network. The narrative goes that, as the rainy season in China comes to a halt around the August to October timeframe each year, cheap and abundant hydroelectricity dries up. This forces many inefficient late-model miners to shut off or move elsewhere to find more affordable, accessible energy — creating migratory or nomadic miners, if you will.
The narrative also claims that the network sees a significant drop in hash rate and difficulty at yearly intervals roughly matching this seasonal decline in Chinese hydroelectric generation. This certainly appears to be the case now, in fall 2020, as many speculate the recent loss of about 48 exahashes per second (Eh/s) (30 percent of the network’s total hash rate) is due to just this phenomenon. But does the data support this for other years?
And what about the recent Bitcoin difficulty adjustment at block height 655,200, one of the largest drops in Bitcoin’s history? Clark Moody’s dashboard shows the block difficulty experienced a 16 percent drop based on the aforementioned loss of network hash rate.
Block Production Rate
The Bitcoin protocol is finely tuned and optimized for certain predictable outcomes. The way the network arrives at these desired results is due to a series of carefully designed system rules and guidelines that were crafted into the free and open source software upon its creation. The Bitcoin time chain is a series of blocks that verify, group, and order transactions based on a preset series of rules. One such rule is the fact that blocks are added to the chain at a programmatic rate of approximately every ten minutes, six blocks per hour, and about 144 per day.
Block Difficulty Adjustments
Block difficulty is generally proportional the amount of computational work miners need to generate to produce a block. The Bitcoin Genesis block had a difficulty of 1, and today the block difficulty is 19,997,335,994,446. This means today it is about 20 Trillion times harder to discover a block compared to the first block. Block difficulty is a unitless Bitcoin network metric.
In order to maintain 10 minute block production rates with an everchanging amount of miners and work being completed, the software adjusts block difficulty — every 2,016 blocks, or roughly once every two weeks — commonly referred to as a Bitcoin block difficulty epoch. This difficulty adjustment algorithm elegantly maintains an average block production rate even with wildly fluctuating network hash rates. Over time, as more mines have tired their luck on the network, block difficulty has automatically adjusts upwards to compensate and stabilize block production rates.
On the chart above, difficulty is seen declining every so often after a reduction in hash rate, and increasing as hash rate goes up. If blocks are minted at a rate faster (or slower) than 10 minutes, on average, that would mean more (or less) computing power is being pointed toward Bitcoin than the difficulty threshold can accommodate. As more or less miners work toward the chain of blocks, the block difficulty difficulty target number will be changed to compensate, ensuring blocks are created at a rate of about one every ten minutes.
While we can clearly see the difficulty decreases on the linear chart, however, on the above logarithmic chart the hash rate and difficulty drawdowns are less perceivable. Historically on the Bitcoin network, block difficulty has trended upward and block difficulty reductions are rare. This is in part due to increasing mining equipment efficiency and effectiveness.
Bitcoin Network Hash Rate
There have only been a handful of months over the past decade where the block difficulty ended at a value lower than it started. This is even more apparent if the view is average Bitcoin network hash rate by month and year. There has not been a month, year over year, where the Bitcoin network hash rate went down.
Seasonal Fluctuations?
So, now that we have established that bitcoin hash rate over long enough time frames is aggressively NgU (Number go Up), is their validity to the seasonal fluctuations? It appears above, that the years 2020, 2019, and 2018 all saw average network hash rates lower toward the end of the year than they were late summer and early fall. What about other years?
Fall 2013
For 2013, the network doesn’t appear to have had a downward difficulty adjustment. This aggressive upward movement may be due to the revolution in ASIC effectiveness that was occurring during this timeframe.
Fall 2014
For 2014, there were some difficulty adjustments downward during the late November time frame, however, difficulty appears to be trending upward during most of the season.
Fall 2015
2015 is a similar story to 2013, the network doesn’t appear to have had a downward difficulty adjustment. More and better ASICs are still being developed.
Fall 2016
So 2016 sees a small difficulty adjustment downward around the October timeframe. Also, it appears that the growth of the network hash rate and difficulty slows down during the same timeframe.
Fall 2017
2017 tells a similar story to 2016, network hash rate growth stalls and difficulty actually adjusts downwards a few different times. This is especially noteworthy, as price was increasing aggressively along these same timelines.
Fall 2018
The Fall of 2018 may be the most obvious seasonal trend of difficulty and hash declining across the network. Important to note that during these timeframes the price was also falling from all-time-highs. A significant percentage of the network, almost half, went offline seasonally. Yet, due to the elegance of the difficulty adjustment algorithm, the peer-to-peer network continued churning along.
Fall 2019
The Fall of 2019 doesn’t show as significant of a decline as the 2018 season, but it does show a few difficulty and hash rate reductions. It also shows a similar stunting of network hash power growth during the same time frames.
Fall 2020
So this brings us to today, the narrative that many Chinese ASICs shut off appears to be valid for the Fall of 2020. Where else would folks have about 48 Eh/s (30% of the network) sitting idly by waiting for abundant and affordable energy? This works out to be about 3 Million Antminer s9 ASIC mining units.
So where does this drop off rank among previous difficulty drops in the October and November time frames? With chain data we can actually see that 2011 had a larger month over month drop, but it occurred over a few different difficulty adjustments. This November 2020 difficulty drop is the largest we have seen in recent years caused by apparent seasonal fluctuations from enterprising Chinese hydroelectric miners. 2012 to 2015 did not see any difficulty drops between these months.
How do these seasonal difficulty and hash rate fluctuations stack up to the entirety of the block history on the Bitcoin network? The histograms for both the difficulty adjustments and hash rate changes.
Bitcoin Mining Death Spiral?
When the network hash rate or price of Bitcoin goes down, there is always much speculation on the possibility of what is colloquially referred to as the “Mining Death Spiral.” The claim goes, that if the price drops low, enough miners were to shut down, and the network would loose a sizable percentage of its hash rate. This would force some miners to liquidate their earnings, pushing market prices lower, and furthering this vicious feedback loop until a death spiral ensued. For a network like Bitcoin, this would result in miners shutting down, blocks would stop being mined, and the time chain would ceased to propagate — Bitcoin would fail. However, as an example, Dogecoin $DOGE is still minting blocks, so this theory may not hold true for every system. There are many enthusiasts, fanatics, and ‘miners of last resort’ that will maintain some of these systems simply for the sake of maintaining them, and the faith of belief.
So let us imagine if 50 percent of the miners stopped mining right at the difficulty adjustment and shut down; what would happen? It would take the remaining half of the network twice times as long to find the 2,016 blocks. This would mean 4 weeks, or about 1 month, to get to the next difficulty adjustment point. What would the ramifications be for the network? The mempool would begin to build up, transactions would become delayed, and fees would increase as folks bid up new even more scarce block space. This is actually exactly what we have seen for a few days after hash rate recently dropped off. However, the Bitcoin network eventually adjusted difficulty, as it has each time that 2,016th block has came up in the past. This difficulty adjustment algorithm is a very elegant solution to a few different challenges facing the Bitcoin network, and because of these types of solutions the system is self-regulating.
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