Efficient Frontier
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Efficient Frontier

Secrets of Bitcoin Mining

From the basics of Bitcoin mining made clear and simple, to its ‘secret’ dynamics which many experts are not aware of: How miners really interact with Bitcoin’s price floor, miners’ seasonal migration and ‘bullish’ miners’ natural selection

Mining rigs in a mining warehouse, nicknamed a mining farm. Source: Bitcoin Wiki
Source: Global Patrol Prices
The percentage of Bitcoin mining power by country. Source: CoinShares
Video from a cryptocurrency mining farm

What’s the point of mining?

All the rules and math that create Bitcoin’s financial network and worldwide money system are open-source and decentralised so that any computer in the world can audit the entire thing. Anyone owning a computer with an internet connection can take part in storing Bitcoin’s transaction history and freely send and receive Bitcoin transactions. But to keep track of which files show the real transaction history and who owns which Bitcoins, the inventor of Bitcoin realized you need to connect a financial ‘weight’ to each of these crucial and important files, so they can be identified and authenticated by anyone.

What do mining machines do?

Creating new ‘pages’ needs to be provably expensive. To create a new page, the mining network is assigned a sort of puzzle, called a hash function, by the Bitcoin program. Solving this type of puzzle takes many resources- expensive ASICs and a lot of electricity to run them around the clock. The name of this puzzle is known as the hash function SHA-256. When the SHA-256 puzzle is solved by trial and error by one of the mining machines around the world, the new ‘page’,which in the world of Bitcoin is called a block, is mathematically stamped by the miner with the answer to the puzzle (and added to the block-chain). Each new block contains approved Bitcon transaction. The miner who solved the SHA-256 puzzle and stamped the new block with it, is automatically given by Bitcoin’s protocol 6.25 bitcoins.

Bitcoin’s “natural selection” created bullish miners

Bitcoin mining depends on miners being rational actors who want to make money, and in return provide financial protection to Bitcoin’s records, but that doesn’t mean miners are purely rational.

The skyrocketing growth of the computing power directed at Bitcoin’s SHA-256 puzzles, counted in TerraHash/s
Source: Canaan’s SEC filing
Miners bullish tendency can be seen in the above chart. When the orange line is below the black line, the miners are selling less coins than they mine, and holding the rest for the future.
The above charts show how Bitcoin miners usually await rising Bitcoin prices to sell batches of mined coins

Mining difficulty adjustments

Bitcoin network difficulty May 2019-May 2022

Debunking popular belief: How miner capitulation helps create a price floor

Today the Bitcoin’s price is around $30,000 with 6.25 Bitcoin being produced about every 10 minutes. For mining to be profitable right now, the electricity cost of a mining operation should be less than $30,000 for each new coin it mines, or the mining farm will be losing money.

Above: A live representation on Tradeblock.com of the last blocks mined. This image shows the block number, mining pool, how long ago it was mined, and the time gap from the last block creation.
The percentage of mining power operating at different electricity costs. Source: Blockware Solutions research report.
Black line: Bitcoin’s price. Orange line:Bitcoin’s hashrate (reflecting the amount of mining computation on bitcoin’s mining network)
Black: Bitcoin’s price Orange: Miner outflows (coins moving out of miner’s Bitcoin accounts)

Mining migration

If Bitcoin wasn’t strange enough, it turns out that up until 2021 when Bitcoin mining was banned in China, many Bitcoin miners migrated seasonally seeking cheap electricity. China which hosted over 50% of Bitcoins hashrate up until 2021, is big on hydroelectric power generated from the flow of rivers.

Average rain fall by month in Chengdu, the capitol of Sichuan. Source: Weather & Climate
Hydroelectric power station built on a river in Sichuan source: China Morning Daily
In orange: Bitcoins hash rate between June 2017 and May 2022

Dry season migration

“When the dry season returned, electricity prices rise again, causing some miners to migrate to Xinjiang and Inner Mongolia where cheap coal and wind power is available year around. Some sources suggest that as many as 500,000 mining units migrated to and from Xinjiang in [2019]. Migration, however, is an expensive endeavor restricted to the most well-capitalised miners.” concluded the CoinShares mining report.



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Sarah Wiesner

follow me on twitter @internethello @bitcoinembassy @efrontier_io