Glassnode report: Bitcoin mining difficulty plummeted historically, miners' profitability doubled

After the largest miner migration in history, the hashrate and mining difficulty of the entire network plummeted, but the Bitcoin network seemed to quickly adapt to market changes. Over the past week, blocks continued to be mined, transactions continued to be settled, miners began to reallocate capital to new jurisdictions, and the price of Bitcoin also consolidated between a high of $36,460 and a low of $32,775, once again showing the extraordinary resilience of this "king of digital currencies."

Now, focusing their analysis on on-chain mining metrics may help provide a clearer picture of how Bitcoin has quickly adapted to this incredible market change.

Bitcoin mining big changes

As the impact of the Bitcoin mining ban in Sichuan and other provinces is fully unfolding, many Bitcoin mining indicators have fluctuated sharply, such as:

1. A large number of mining machines were “unplugged and powered off”, resulting in a large drop in computing power;

2. The speed of block mining is becoming slower and slower;

3. The difficulty of the entire network has seen the largest reduction in history.

Last week, the average block time based on the 24-hour average soared to 1,958 seconds (32.6 minutes), 226% more than the target block time of about 600 seconds. However, this situation only occurred briefly on June 28, after which the average block time of the entire network quickly returned to around 800 to 900 seconds.

Above: Real-time chart of average block interval

However, if we extend the timeline a little bit, we will find that this is the slowest average block time Bitcoin has experienced since the cypherpunk era in 2009. The previous longest average block time was about 1,774.5 seconds, which occurred when the digital currency market pulled back after reaching its peak in 2017.

Above: Block interval history chart

Next, let's analyze the recent transfer of Bitcoin computing power. In order to better show the trend of change, we will refer to the peak period of computing power from April 2021 to early May 2021, and use the 24-hour moving average trend to reasonably explain the natural change of computing power.

On May 13, the Bitcoin network computing power soared to 171 EH/s (reaching 180 EH/s at its peak). If calculated based on this peak value, the current computing power value of 89.08 EH/s means that the computing power of the entire Bitcoin network has fallen by about 50%. On June 28, the computing power of the entire Bitcoin network also hit a local low of 58 E (the average block time on June 28 was also extended to 1,958 seconds).

Currently, the computing power of the entire Bitcoin network has recovered and stabilized in the range of 88 to 110 EH/s, but it has still dropped by about 38-49% overall. There is no doubt that the previous Bitcoin mining ban in Sichuan and other provinces still had a huge impact.

Above: Bitcoin hashrate real-time chart

At this stage, the difficulty of Bitcoin mining has been reduced to 14.36 T, creating the largest drop in history (about 28%). It is expected that the difficulty of Bitcoin will be adjusted more significantly in two weeks, when the difficulty of the entire network will drop to 10.30 T. The Bitcoin Difficulty Ribbon indicator is an indicator used to measure the connection between changes in network difficulty and miners' selling pressure. It is composed of a simple moving average of mining difficulties at different times. Through this curve band (as shown in the figure below), it is easy to see the changes in mining difficulty and the impact of mining on Bitcoin prices. At present, the indicator has returned to the previous level of "surrender" in the bear market in 2018, and it seems to be inverted, which is good news for bulls.

Miners’ income is increasing instead of decreasing?

From the historical market, the inversion of Bitcoin's difficulty band will drive the market bullish, but the current situation may be different. This is because domestic miners are transferring mining machines and may need to sell off previously accumulated BTC inventory to pay for huge logistics costs, thus creating selling pressure on the market. However, it should be noted that domestic miners do not represent all, and about 50% of miners in the overseas market have not been affected, and their income may increase to some extent.

Above: Bitcoin difficulty band real-time chart

In April, when Bitcoin was trading between $50,000 and $60,000, the hash rate of the entire network peaked, and miners were able to earn around $50 million to $60 million a day. Now, even though the price of Bitcoin has fallen by half, miners who continue to operate are more likely to be profitable because an estimated 38-49% of their competitors have gone offline (at least in the short term).

The latest data shows that the total daily revenue of Bitcoin miners is now about $25 million to $30 million, but due to the sharp decrease in the number of miners continuing to mine online and the unchanged daily output of BTC, there are fewer competitors to share the spoils. According to the analysis results, the profitability of Bitcoin miners that continue to operate has increased by nearly 2 times, which is comparable to the peak of Bitcoin prices in April.

Above: Real-time chart of daily miner income

The Miner Outflow Multiple, a metric that tracks miner spending relative to an annual average, shows that miners have not been selling off their Bitcoin in large numbers recently, even as a large number of mining machines have gone offline. In fact, we can see a hint of "cyclicality" in miner spending behavior:

1. Holding in a bear market (green), the miner outflow multiple is flat, which means that miners are distributing Bitcoin steadily, neither fast nor slow;

2. In the bull market (red), the miners’ outflow multiples are rising, which means that miners are using the power of the bull market to accelerate the sale of Bitcoin;

3. After the market peaked (blue), selling decreased and the miner outflow multiples trended downward, which means that miners' spending slowed down, or they preferred to limit excessive selling pressure in the market.

What is impressive is that even during the period of the network's hash rate plummeting, the market did not see a significant increase in miners' selling behavior. On the other hand, the speed at which Bitcoin's network hash rate recovers can also be used to assess miners' selling behavior. Simply put -

1. If the computing power market recovers quickly, it means that the risk of Bitcoin miners selling BTC on a large scale will be reduced, because miners quickly find new sites to rebuild their mining operations, sell hardware, or use other channels to pay for their operating costs. This may give Bitcoin some room to recover and return to its previous highs.

2. If the recovery time of the computing power market is longer, it means that the costs or debts borne by Bitcoin miners will increase, which will create a higher possibility for miners to sell Bitcoin. They may have to sell their Bitcoin holdings in order to obtain more fiat currency to pay for their operating costs.

Above: Real-time chart of miner outflow multiples

In fact, there has been a dramatic change in miners’ overall spending behavior since the beginning of 2020. Looking at Bitcoin’s transaction history, you will find that miners have consistently sold (spent) more Bitcoin than they have accumulated, so overall, the unspent Bitcoin supply has always been in a structural downward trend.

The chart below shows the relationship between the unspent miner supply (i.e., bitcoin held by miners that has never been traded on Coinbase) and the 365-day moving average. Since mid-2020, the unspent supply of bitcoin by miners has been inverted.

This shows that miners have begun to accumulate Bitcoin in a way that has never been seen before. This "weird" phenomenon may be related to the current market environment, and there are many factors behind it that need to be considered:

1. In 2020, the global macro-monetary structure (such as the Federal Reserve's implementation of quantitative easing monetary policy) is favorable to Bitcoin, which further increases miners' belief in continuing to hold Bitcoin.

2. Miners can obtain more and better financing options, such as staking Bitcoin for loans, using liquid options and futures markets to hedge risks, and so on.

3. Due to the global chip shortage and the reduction in the production of ASIC mining machines, as prices rise, even if the current Bitcoin network computing power has declined, miners will still be profitable because there are almost no new competitors in the market.

As prices rose in the bull market, BTC mining was (and remains) very profitable during this halving cycle.

Above: Real-time chart of Bitcoin supply not spent by miners

Bitcoin is more scarce than gold?!

Many analysts point out that the current miner profitability indicator Puell Multiple has fallen into the "undervalued zone." (Puell Multiple is a currency value valuation indicator that measures miner income and can be used to assess the degree of market valuation. When the indicator is below 0.5, it enters the undervalued zone, and when it is above 4.0, it enters the overvalued zone.)

1. The higher the Puell Multiple, the stronger the profitability, so miners have a high incentive to sell, thereby increasing the liquid supply in the market.

2. The lower the Puell Multiple, the worse the profitability, which also means that some miners choose to "surrender", and stronger miners will obtain a larger share of computing power, which will eventually lead to tight liquidity supply in the market.

As with the inversion of the Bitcoin difficulty band, the Bitcoin Puell Multiple entering the “underestimation zone” is also a rare event, having only occurred five times in history.

Above: Puell Multiple real-time chart

Frankly speaking, there are actually some technical reasons why the Puell Multiple has dropped like a rock recently and then quickly reversed:

On June 28, Bitcoin block times slowed by 226%, with only 58 (40%) of the 144 target blocks mined that day. As a result, only 40% of Bitcoin production was released that day, which also caused miners' total revenue to drop by 60%. But now, with the completion of the Bitcoin difficulty adjustment, this problem has been corrected.

Above: Real-time chart of Bitcoin inflation rate

It is worth mentioning that the recent issuance rate of Bitcoin has fallen to a historical low of 0.71%, making the stock-to-flow index value reach 140. This means that technically, Bitcoin is already more scarce than gold (the gold stock-to-flow index value is 59, that is, Bitcoin is 2.37 times scarcer than gold) - even if this situation only lasts for one day, the symbolic significance is greater than the actual significance!