What is “The Great Miner Migration” and how could it affect the price of bitcoin?
You may have heard news of a great exodus of bitcoin miners out of China, where a series of energy supply issues and a regulatory clampdown have produced a more hostile environment for the bitcoin mining industry. This is something we at BR Capital covered briefly in our latest quarterly report, explaining that — although the miner migration may sound negative — it actually offers some positive possibilities for the BTC price.
To understand this fully, however, and arrive at some expectations for the future of the bitcoin market, we need to take a step back and understand some of the fundamentals of mining — and that’s the purpose of this article.
Hash Rate and Mining Difficulty Basics
Bitcoin hash rate and mining difficulty are critical variables for understanding the impact of miner behaviour, so I’ll explain them quickly for those who are unfamiliar:
Bitcoin hash rate is the total power of all the machines that are being used to mine Bitcoin at any point in time. More specifically, it is the speed at which all these machines are calculating cryptographic operations to solve blocks in the blockchain. Hash rate is measured in hashes per second H/s.
Mining complexity is a parameter that has been designed into bitcoin since the beginning to make sure that miners don’t become so good at mining that they prevent bitcoin from being scarce.
For bitcoin, mining complexity is recalculated every 2016 blocks: 1 block is mined for about 10 minutes, so complexity is recalculated about every 2 weeks. Accordingly, if during this time the hash rate has increased, perhaps because new miners have joined the network, the speed of finding a block will increase (i.e. it takes less than 10 minutes to mine one block), which means that 2016 blocks will be mined faster and the recalculation will increase mining difficulty.
It also works in the opposite direction: If some of the mining equipment is disabled, the network hash rate drops, block mining takes longer than 10 minutes, so the difficulty of mining will be reduced.
Explaining big movements in recent mining variables
Over the past few months, bitcoin’s hash rate dropped rapidly, rose again, but eventually fell back to the values of two years ago. During the biggest drops, it took up to 20 minutes to form a block on the network, as opposed to the standard 10 minutes. Fortunately, mining difficulty moved to compensate, as shown in the following graph:
The sharp decline in hash rate in April was caused by a power outage in China due to comprehensive safety inspections after explosions and floods in coal mines in several Chinese provinces. The decline was almost 30%. However, the hash rate quickly picked up and reached an all-time high, above 180 EH/s (180mln TH/s)
After that, in May, another downward movement started, again possibly triggered by electricity outages due to low rainfall and coal shortages in China’s Sichuan province. However, this time the Chinese authorities imposed a complete ban on mining, which led to a more than 2-fold drop in hash rate to a local low, comparable to the level of September 2019 — about 85 EH/s (85mln TH/s).
All this news also affected the price of mining equipment, which dropped 75%. Moreover, Bitmain (a major Chinese manufacturer of mining hardware) suspended sales of its bitcoin miners, explaining this step as an attempt to help companies leaving the mining business to sell their equipment on the secondary market.
However, since the first of July, the hash rate began its gradual recovery. During this time, Chinese mining giants have moved their facilities mainly to North America and Central Asian countries like Kazakhstan.
The relocation of equipment also naturally affected miners’ own accumulation of BTCs. A decrease in accumulation since mid-May and the subsequent sale of BTC to cover costs and losses from equipment downtime can only have contributed to the downturn in the BTC price. The new phase of accumulation correlates with the phase of hash rate growth that began in early July and — perhaps coincidentally, perhaps not — BTC price began to grow again from mid-July.
Could miner migration be good?
As we mentioned in our quarterly report, the migration is certainly good for the decentralization of bitcoin. It was arguably never healthy to have 60% of all mining located in a single country, subject to the opaque policy changes of the Chinese government.
The market’s survival of the migration, which in the past could be have been a serious calamity with long-term implications, also points to the fundamental strength of the bitcoin economy.
The migration may also be good for environmental reasons, as mining activity is moving to places like Texas where there is significant use of renewable energy, plus a relatively well-balanced energy infrastructure able to distribute this energy to where the miners are located.
Check out our full quarterly report right here.
